UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2018
 
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from                        to                         
 
Commission file number: 000-49799
OSTKLOGOA16.JPG  
OVERSTOCK.COM, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
87-0634302
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
799 West Coliseum Way, Midvale, UT
 
84047
(Address of principal executive offices)
 
(Zip code)
 
 
 
(801) 947-3100
(Registrant's telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value
 
Nasdaq Global Market
    
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o     No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o     No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), (2) has been subject to such filing requirements for the past 90 days. Yes  ý    No  o
     Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ý     No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
 
Accelerated filer  x
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
Emerging growth company  o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). Yes  o   No  ý
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second quarter ( June 30, 2018 ), was approximately $689.3 million based upon the last sales price reported by Nasdaq. For purposes of this disclosure, shares of Common Stock held by directors and certain officers and by others who may be deemed to be affiliates of the registrant have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be affiliates as that term is defined in the federal securities laws.
There were 32,252,029 shares of the Registrant's common stock, par value $0.0001, outstanding on March 13, 2019 .
DOCUMENTS INCORPORATED BY REFERENCE



Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 2019 Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.




TABLE OF CONTENTS
 
 
 
 
 
 
Part I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
Part II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
Part III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
Part IV
 
Item 15.
Item 16.
 
 
 

O, Overstock.com, O.com, Club O, Main Street Revolution, and Worldstock are registered trademarks of Overstock.com, Inc. O.biz and Space Shift are also trademarks of Overstock.com, Inc. Other service marks, trademarks and trade names which may be referred to herein are the property of their respective owners.

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SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-K and the documents incorporated herein by reference, as well as our other public documents and statements our officers and representatives may make from time to time, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These forward-looking statements involve risks and uncertainties, and relate to future events or our future financial or operating performance. The forward-looking statements include all statements other than statements of historical fact, including, without limitation, all statements regarding:
our estimates of our financial results for the quarter ending March 31, 2019, and all other estimates regarding
the quarter ending March 31, 2019;
our strategies and plans for our retail business and our Medici businesses, including our tZERO initiatives;
the possibility that we will sell or attempt to sell our retail business or pursue or attempt to pursue one or more other strategic alternatives that could change our business dramatically, as well as the possibility that we will determine not to sell or attempt to sell our retail business or pursue any other strategic alternative at all in the foreseeable future;
the possibility that we may sell our retail business and all statements about the potential effects of any such sale;
whether we would or would not submit any sale of our retail business to a vote of our stockholders;
whether we would or would not distribute any proceeds of any sale of our retail business to our stockholders by any means or use those proceeds in our blockchain initiatives;
our expectations regarding the costs, benefits and risks of Medici Ventures' and tZERO's initiatives, including their acquisitions or purchases of interests in other companies;
potential negotiated equity investments in Overstock and/or tZERO;
the plans of tZERO and Medici Ventures and the costs, benefits and risks of their initiatives, including those of tZERO's ownership of SpeedRoute and PRO Securities;
our expectations regarding the costs, benefits and risks of the recently-completed tZERO security token offering;
our expectations regarding the costs, benefits and risks of our efforts and plans to advertise or offer other additional businesses, innovations and projects that we or our subsidiaries may engage in, offer or advertise in the future;
our expectations regarding Medici Land Governance Inc., a newly-formed public benefit corporation;
our efforts to improve our natural search results in our retail business;
our future operating or financial results, or other GAAP or non-GAAP financial measures or amounts or anticipated changes in any of them;
our capital requirements and our ability to fund them;
the adequacy of our liquidity and our ability, if any, to increase our liquidity or capital resources;
tZERO's plans, including without limitation its plans regarding its Token Trading Systems;
our plans and expectations regarding the costs, benefits, and risks of attempting to develop technology applications including applications using or relating to blockchain technology and our plans to commercialize any of these potential applications;
the competition we currently face and anticipate;
the effects of current and future government regulation;
our expectations for our international sales efforts and the anticipated results of our international operations;
our plans for further changes to our business;
our expectations regarding our emphasis on home and garden product offerings;
our expectations regarding our potential liabilities or exposure to claims under Delaware's Abandoned Property Law;
our expectations regarding the actual costs of our employees' health insurance claims for which we may be liable; and
our other statements about the anticipated benefits and risks of our business and plans.
Further, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, likely, expect, plan, seek, intend, anticipate, project, believe, estimate, predict, potential, goal, strategy, future or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those contemplated by our forward-looking statements for a variety of reasons, including among others:
any changes we may make to our business as a result of our current ongoing review of potential strategic alternatives, which could involve a sale of our retail business and/or additional equity or debt financings;

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the possibility that we may sell our retail business and retain the after-tax proceeds of the sale for use in our blockchain initiatives, which would result in our stockholders owning equity interests in a publicly-held corporation seeking to develop entirely new businesses and revenue streams, without the benefits of our current retail business and the approximately $1.8 billion it generates in annual net revenues, but with most if not all of the expenses of operating a publicly-held corporation;
the potentially substantial corporate level income tax expense we could incur if we were to sell our retail business in a taxable transaction;
the possibility that our well-publicized review of potential strategic alternatives including the potential sale of our retail business may distract our management and other employees, may cause members of our management and/or other key employees to seek employment elsewhere, and may have adverse effects on our business and financial results;
the technical, operational, financial, regulatory, legal, reputational, marketing and other obstacles we face in trying to create a profitable business from our blockchain initiatives;
our ability to reach a definitive agreement or complete a capital raising transaction for tZERO on the terms contemplated by the previously-disclosed memorandum of understanding we recently signed with GSR Capital and Makara Capital;
the possibility that the proceeds of the security token offering recently completed by tZERO might be treated as income to us for federal income tax purposes;
difficulties we have encountered and continue to encounter with changes that Google has made to its natural search engine algorithms, which have periodically resulted in lower rankings of our products and may continue to do so, and future changes that Google and other search engine companies may make to their natural search engine algorithms, which may have similar effects on us;
increasing competition, including from Amazon, from well‑funded companies willing to incur substantial losses in order to build market share, and from others including competitors with delivery capabilities that we cannot currently match and do not expect to be able to match in the foreseeable future;
difficulties we may encounter in connection with our efforts to offer services to our customers outside of our retail business;
difficulties, including expense and any operational or regulatory issues we may encounter in connection with tZERO or its subsidiaries;
technical, operational, regulatory or other difficulties we may encounter with our Medici or tZERO blockchain and financial technology initiatives, including any difficulties we may have marketing any products or services tZERO may offer, whether due to lack of market size or acceptance or as a result of competition from any of the numerous competitors seeking to develop competing technologies or systems or as a result of patents that may be granted to other companies or persons, and losses we may continue to incur in connection with our Medici and tZERO blockchain and technology initiatives;
the difficulties tZERO will face in attempting to generate revenues from blockchain-based applications of any nature, including its potential DLR software product;
impairment charges we may recognize with respect to assets or businesses that we, Medici Ventures or tZERO have acquired or may acquire;
any liability or expense we may incur as a result of our interests in other companies, whether as a result of regulatory issues or otherwise;
any downturn in the U.S. housing industry or other changes in U.S. and global economic conditions or U.S. consumer spending;
the imposition of tariffs or occurrence of other factors that increase the price of importing into the U.S. the types of merchandise we sell in our retail business;
modifications we may make to our business model from time to time;
the mix of products purchased by our customers and changes to that mix;
any claims we may face regarding cyber security issues or data breaches or difficulties we encounter regarding Internet or other infrastructure or communications impairment problems or the costs of preventing or responding to any such problems;
any problems with or affecting our payment card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could interrupt the normal operation of the payment card processors or any difficulties we may have maintaining compliance with the rules of the payment card processors;
the possibility that we will be unable to raise additional capital or obtain financing adequate to enable us to continue our operations;

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problems with or affecting the facility where substantially all of our computer and communications hardware is located or other problems that result in the unavailability of our Website or reduced performance of our transaction systems;
any losses or issues we may encounter as a consequence of accepting or holding bitcoin or other cryptocurrencies, whether as a result of regulatory, tax or other legal issues, technological issues, value fluctuations, lack of widespread adoption of bitcoin or other cryptocurrencies as an acceptable medium of exchange or otherwise;
any difficulties we may encounter as a result of our reliance on numerous third parties that we do not control for the performance of critical functions material to our business;
difficulties we may encounter in connection with our efforts to emphasize our home and garden product offerings and to brand ourselves as a home and garden shopping destination, including the risk that our sales of home and garden product offerings could decrease substantially as a result of a significant downturn in some or all of the U.S. housing market;
difficulties we may encounter in connection with our efforts to expand internationally, including claims we may face and liabilities we may incur in connection with those efforts;
adverse results in legal proceedings, investigations or other claims;
any difficulties we may have optimizing our warehouse operations;
any decrease in the volume of retail sales, particularly in home goods, and the occurrence of any event that would adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps;
the possibility that our liability for our employees' health insurance claims increases as a result of more claims or larger claims than we expect and/or increases in the costs of healthcare generally; and
the other risks described in this report or in our other public filings.

In evaluating all forward-looking statements, you should specifically consider the risks outlined above and in this Report, especially under the headings "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement. Although we believe that our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee or offer any assurance of future results, levels of activity, performance or achievements or other future events.
Our forward-looking statements contained in this report speak only as of the date of this report and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report or any changes in our expectations or any change in any events, conditions or circumstances on which any of our forward-looking statements are based.

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PART I
ITEM 1. BUSINESS
            The following description of our business contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Special Note Regarding Forward-Looking Statements." Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K, including those set forth above in the Special Cautionary Note Regarding Forward-Looking Statements or in Section 1A under the heading "Risk Factors" or elsewhere in this Annual Report on Form 10-K.

Introduction

We are an online retailer and advancer of blockchain technology. Through our online retail business, we offer a broad range of price-competitive products, including furniture, home decor, bedding and bath, and housewares, among other products. We sell our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites. Our retail business initiatives are described in more detail below under "Our Retail Business."

Our Medici business initiatives seek to develop and advance the concepts of "Government as a Service" and a "Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage the transparency and immutability of blockchain technology to generate efficiencies and increase security and control in six areas of civilizational necessity: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. Our Medici business initiatives include our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), which conducts the majority of its business through its majority-owned subsidiary tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. Medici Ventures currently holds minority equity interests in several technology companies whose focuses include the areas mentioned above. Our Medici business initiatives are described in more detail below under "Our Medici Business" and our tZERO business initiatives are described in more detail below under "Our tZERO Business Initiatives."

We are considering a range of potential transactions, including a sale of our retail business and additional equity or debt financings. Our Board of Directors continually discusses a variety of potential strategic and financial options and other changes to our business, but has not approved or made any determination to consummate any strategic transaction, and may not do so in the foreseeable future or at all. Our strategic initiatives are described in more detail below under “Strategic Initiatives.”

Our company, based near Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999 and were re-incorporated in Delaware in 2002. As used herein, "Overstock," "Overstock.com,", "O.co," "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.

Our Retail Business

Our retail business generates nearly all of our net revenues. In our retail business, our goal is to provide goods to furnish and accessorize "dream homes" for our target customers—consumers who seek quality, stylish merchandise at bargain prices. At December 31, 2018 , we offered 4.9 million products ( 8.9 million SKUs), of which over 99% were in-line products (products in active production), including more than 25,000 private label products offered under eleven private label brands. We believe that the furniture and home goods market, which is highly fragmented and has traditionally been served by brick and mortar stores, will continue transitioning to online sales, particularly as Millennial consumers (which we define as those aged 20-36), who are generally comfortable shopping online, start families and move into new homes. We regularly change our product assortment to meet the evolving preferences of our customers and current trends. Our products include, among others, furniture, home décor including rugs, bedding and bath, home improvement, and kitchen items. We compete primarily based on:

Quality customer experience with an emphasis on price, value, and a wide assortment of products delivered in a personalized format with the convenience of our mobile app, and with the benefits of our award-winning customer care;
Proprietary technologies which we believe help us provide our customers with a quality shopping experience;

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Logistics capabilities tailored to the furniture and home goods category and developed over our many years of e-commerce experience;
Long-term mutually beneficial relationships with our partners, which currently number approximately 4,000 ; and
Our Club O Loyalty Program, which we believe increases customer engagement and retention.

For 2018 , nearly all our retail sales through our Website were from transactions in which we fulfilled orders through our network of approximately 4,000 third-party manufacturers, distributors and other suppliers ("partners") selling on our Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. We provide our partners with access to a large customer base and convenient services for order fulfillment, customer service, returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. Our retail sales also include direct sales of our own inventory shipped from our warehouses. Our warehouses primarily fulfill orders from direct sales of our own inventory, including some customer returns of partner products. Our warehouses generally ship between 1,500 and 3,000 packages per day and up to approximately 6,000 packages per day during peak periods.

During the years ended December 31, 2018 , 2017 and 2016 our sales were almost entirely to customers located in the United States and no single customer accounted for more than 1% of our total net revenue.

Additional Offerings

We offer additional products or services that may complement our primary retail offerings, but are not significant to our retail revenues.

Our international business where we offer products to customers outside the United States using third party logistics providers;
Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the world to help improve the lives of people in emerging economies;
Pet Adoptions, a free service and portal within our Website that leverages our technology to display pets available for adoption from shelters across the United States;
Overstock Hotels, portal within our Website that enables customers to search and book hundreds of thousands of properties worldwide, including big box brands, modern boutiques, and more;
Supplier Oasis, a single integration point through which our partners can manage their products, inventory and sales channels, and also obtain multi-channel fulfillment services through our distribution network; and
Businesses advertising products or services on our Website.

Manufacturer, Distributor, and Supplier Relationships

To the extent possible we maintain manufacturer, distributor, and supplier relationships, and seek new manufacturer, distributor, and supplier relationships, and also use our working capital, to ensure a continuous allotment of product offerings for our customers. Generally, our manufacturers, distributors, or suppliers regularly communicate to us the quantity of products that are held in reserve for us, but our arrangements with them generally do not guarantee the availability of those products for a set duration. Our manufacturer, distributor, and supplier relationships are based on historical experience and are generally non-exclusive and we retain the right to select and change our suppliers at our discretion. Generally, manufacturers, distributors, and suppliers do not control the terms under which products are sold through our Website.

Sales and Marketing

We use a variety of methods to target our retail consumer audience, including online campaigns, such as advertising through keywords, product listing ads, display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail, and viral and social media campaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.

Customer Service

We are committed to providing superior customer service. We staff our customer service department with dedicated in-house and outsourced professionals who respond to phone, instant online chat, and e-mail inquiries on products, ordering, shipping status, returns, and other areas of customer inquiry.


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Technology

We use our internally developed Website and a combination of proprietary technologies and commercially available licensed technologies and solutions to support our retail operations. We use the services of multiple telecommunications companies to obtain connectivity to the Internet. Currently, our primary computer infrastructure is located in a data center in Utah. We also have other data centers which we use for backups, redundancy, development, testing, disaster recovery, and corporate systems infrastructure.

Competition

Internet retail is intensely competitive and has relatively low barriers to entry. We believe that competition in this industry is based predominantly on:

price;
product quality and assortment;
shopping convenience;
website organization and load speed;
order processing and fulfillment;
order delivery time;
customer service;
website functionality on mobile devices;
brand recognition; and
brand reputation.

We compete with other online retailers, traditional retailers, and liquidation "brokers" which may specifically adopt our methods and target our customers. We currently or potentially compete with a variety of companies that can be divided into several broad categories:

online discount general retailers;
online private sale sites;
online specialty retailers;
online liquidators;
online retailers who have or are developing significant "brick and mortar" capabilities; and
traditional general merchandise and specialty retailers and liquidators, many of which have a significant online presence.

Many of our current and potential e-commerce competitors have greater brand recognition, longer operating histories, larger customer bases, and significantly greater financial, marketing, and other resources than we do. Further, any of them may enter into strategic or commercial relationships with larger, more established and well-financed companies, including exclusive distribution arrangements with our vendors or service suppliers that could deny us access to key products or needed services, or acquisitions of our suppliers or service providers, having the same effect. Many of them do or could devote greater resources to marketing and promotional campaigns and devote substantially more resources to their website and systems development than we do. Many have supply chain operations that decrease product shipping times to their customers, have options for in-store product pick-up, allow in-store returns, or offer other delivery and returns options that we do not have. New technologies, the continued enhancement of existing technologies, developments in related areas such as same-day product deliveries, and the development of proprietary delivery systems increase competitive pressures on us.

Seasonality

Our retail business is affected by seasonality because of the holiday season, which historically has resulted in higher sales volume during our fourth quarter, which ends December 31. We recognized 24.8% , 26.2% , and 29.2% of our annual revenue during the fourth quarter of 2018 , 2017 , and 2016 , respectively. While we had lower sales volume during Q4 2018, we anticipate the trend of higher sales volume during our fourth quarter to continue for the foreseeable future.

Financial Information about Business Segments and Geographic Areas

As described further in Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments, contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K, we determined our segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. Our Retail business is a

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reportable segment. As described below, our Medici business is comprised of many components or operating segments, including our tZERO reportable segment. We use pre-tax net income (loss) as the measure to determine our reportable segments. As a result, tZERO is the only reportable segment of our Medici business as it is quantitatively significant. The remaining Medici business operating segments are not significant and are included in Other. See Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments for information regarding our business segments and geographical areas.

Intellectual Property and Trade Secrets

We regard our domain names and other intellectual property as critical to our success. Included in our intellectual property is some of the financial technology we have developed as part of our Medici initiatives. We rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, affiliates, and others to establish and protect our proprietary rights, including the law pertaining to trade secrets.
 
Our Medici Business

In late 2014, we began working on initiatives to develop and advance blockchain technologies. We pursue these initiatives through our wholly-owned subsidiary, Medici Ventures and its majority-owned subsidiary tZERO. These initiatives remain in the start-up phase, and neither Medici Ventures nor tZERO has generated significant revenues from any blockchain-based technology or application of blockchain technology. As of December 31, 2018 , we have spent approximately $209.6 million in our Medici business since its inception, with the majority of that being spent in tZERO.

Medici Ventures

Medici Ventures' strategy is to develop and advance the concepts of "Government as a Service" and a "Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control in six areas of civilizational necessity: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. A blockchain is a cryptographically secured, distributed infrastructure, or network, which may be accessed and, in some cases, maintained by each member of the network. Medici Ventures has a team of approximately 37 software engineers, developers and other technologists who work in blockchain development and deployment and enterprise level software development and deployment. Medici Ventures provides the services of its software engineers, developers, or other technologists to other blockchain companies. Medici Ventures also owns strategic minority equity interests in several blockchain-related companies, each of which focuses on at least one of the Government as a Service areas mentioned above. Medici Ventures takes an active interest in and holds seats on the boards of some of these companies. These companies include technology companies whose focuses include commercial blockchain applications for identity and social media, property and land, money and banking, capital markets, supply chain, and voting. All of the companies in which Medici Ventures holds strategic equity interests are startup businesses, businesses in the development stage, or businesses with a short operating history. The majority of Medici Ventures' business is its 80% interest in tZERO, which, as described below, is a financial technology company pursuing potential financial applications for blockchain technologies.

See "Risk Factors-Additional Risks Relating to Our Medici Business."

tZERO

Medici Ventures' majority-owned subsidiary tZERO is a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. tZERO has a team of approximately 50 software engineers, developers and other technologists who focus on developing and exploring opportunities for novel applications of blockchain technology. As a result of its early stage of development, tZERO has not yet generated revenue from any commercially available blockchain-based applications. tZERO is currently involved in, among other things, the following:

Blockchain Services - Token Trading Systems . In connection with Overstock's 2016 SEC-registered offering of Blockchain Voting Series A Preferred Stock (the "Series A Preferred"), tZERO developed a suite of software and technologies referred to as the tZERO Issuance and Trading Platform (the "tZERO Platform"). The Series A Shares trade exclusively on the PRO Securities ATS, which utilizes the tZERO Platform. tZERO has been leveraging its experience and expertise from developing the tZERO Platform for the Series A Preferred to develop trading systems that are capable of trading tZERO's Preferred Equity Tokens ("tZERO Security Tokens"), issued in a private placement completed in October 2018, and, ultimately, other issuer's digital securities (such systems, the "Token Trading Systems"). First, in January 2019, the PRO Securities ATS, utilizing the tZERO Platform, partnering with Dinosaur Financial Group, LLC ("Dino") and Electronic Transaction Clearing, Inc. ("ETC"), each

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SEC-registered broker-dealers and FINRA members, began facilitating private placement resales of tZERO Security Tokens to accredited investors in reliance upon an exemption from registration under Section 4(a)(7) of the Securities Act.  Second, in June 2018, tZERO and BOX Digital Markets LLC ("BOX Digital") announced that they had entered into a joint venture, named Boston Security Token Exchange LLC, intended to develop a U.S. national securities exchange (the "Exchange") with regulatory approvals that would enable the Exchange to trade digital securities. The Exchange will require approval from the U.S. Securities and Exchange Commission prior to beginning operations. tZERO is creating the necessary technology, and will manage the ongoing technology implementation, administration, maintenance and support. BOX Digital is providing executive leadership and regulatory expertise.  Subject to obtaining SEC approval, tZERO and Box Digital intend for the Exchange to operate as a facility of BOX Options Exchange, an existing registered U.S. securities exchange. We have been informed that the management of the joint venture continues to work with the Staff of the SEC, and anticipates filing the proposed trading rules of the Exchange in the second quarter of 2019. The commencement of operations of the Exchange would be subject to approval by the SEC of the trading rules and other matters. tZERO continues to explore the viability of other Token Trading Systems, any of which may be developed as an additional functionality of the PRO Securities ATS, as a functionality of another U.S. alternative trading system, as a functionality of a non-U.S. trading system or a non-U.S. exchange that tZERO may operate or designate, or any other format, wherever situated.

tZERO Preferred Equity Tokens. tZERO issued the tZERO Security Tokens on October 12, 2018, and in January 2019, tZERO began secondary trading of tZERO security tokens by accredited investors using digital securities brokerage accounts at Dino, which is serving as the introducing broker-dealer in connection with the PRO Securities ATS.

Blockchain Services - Digital Locate Receipts ("DLR") software. The "digital locate receipt" software (the "DLR Software") is currently in customer production testing, which is being conducted by a third party, and tZERO has not yet entered into any commercial licenses with any licensees. The DLR Software is intended to help broker-dealer licensees with stock inventory to both load and manage their inventory in order to assist short sellers of public securities in establishing that they have located available shares in the U.S. public securities market prior to effecting short sales. The DLR Software is intended to enable licensees to create a blockchain-based record of the shares that the licensee has made available for "locates" using customizable DLR Software functionality and of the daily purchases of the right to "locate" specifically identified shares for purposes of compliance with regulatory requirements. The broker-dealer licensees of DLR Software are the parties responsible for ensuring that locates issued using the DLR Software comply with all applicable regulations, and the commercial viability of the DLR Software is dependent on the ability of broker-dealer licensees to establish locates using the DLR Software as an effective means of satisfying regulatory obligations in connection with effecting short sales.

Blockchain Services - Bitsy, Inc. Effective January 1, 2019, tZERO acquired 100% of the equity interest in Bitsy, Inc. by purchasing the 67% equity interest in Bitsy held by Steve Hopkins, Medici Ventures' former chief operating officer and general counsel, and current president of tZERO, and affiliates for $8.0 million in cash, and purchasing the remaining 33% of the Bitsy common stock from Medici Ventures for a $4.0 million convertible promissory note due December 31, 2020 and an assignment of certain intellectual property to Medici Ventures. In September 2018, Bitsy announced that it had begun a limited beta launch of a digital wallet service intended to create a bridge between traditional fiat currencies and cryptocurrencies.

Non-blockchain services - SpeedRoute and PRO Securities . tZERO wholly owns two registered broker-dealers, SpeedRoute, LLC ("SpeedRoute") and PRO Securities, LLC ("PRO Securities"). SpeedRoute is an electronic, agency‑only Financial Industry Regulatory Authority, Inc. ("FINRA")-registered broker-dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are registered broker-dealers. SpeedRoute does not hold, own or sell securities. PRO Securities is a FINRA-registered broker-dealer that owns and operates the PRO Securities alternative trading system (the "PRO Securities ATS"), which has filed a Form ATS with the Securities and Exchange Commission ("SEC") notifying the SEC of its activities as an alternative trading system, or ATS. The PRO Securities ATS is a closed system available only to its broker dealer subscribers. PRO Securities does not accept orders from non-broker dealers, nor does it hold, own or sell securities.

Non-blockchain services - Verify Investor, LLC. tZERO purchased 81.0% of Verify Investor, LLC, an accredited investor verification company, for $12 million in cash, in February 2018. Verify Investor, LLC, through its website VerifyInvestor.com, provides a fast, easy, and cost-effective method of compliance for companies seeking to verify their investors as accredited investors.

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tZERO is no longer offering automated investment advisory services through tZERO Advisors or electronic discount trading through Muriel Siebert & Co., Inc. (Member: FINRA & SIPC) under the FinanceHub tab on our Website. On January 18, 2019, tZERO sold its entire equity interest in StockCross Financial Services, Inc. to StockCross Financial Services, Inc. and Muriel Siebert & Co., Inc. for an amount equal to our original purchase price.

In January 2019, tZERO obtained a patent from the United States Patent and Trademark Office for a system that can take orders to trade “digital transactional items” such as securities, tokens, shares, cash, and other assets from broker dealers and then translate the orders into crypto orders on a digital trading platform or exchange. The patent was recently awarded and to date has not had any effects on tZERO’s business. tZERO believes that the patent will assist in protecting tZERO's proprietary technologies as competitors begin to develop their own trading platforms.

In March 2019, we disclosed that we had executed a Memorandum of Understanding regarding a potential equity investment of up to $100 million in tZERO to be co-led by GSR Capital and Makara Capital, subject to due diligence, negotiation of binding contracts and regulatory approval. We are in continuing discussions regarding the potential investment, but have not yet entered into any definitive agreement.

We believe that a number of organizations are or may be working to develop trading systems utilizing distributed ledger or blockchain technologies or other novel technologies that may be competitive with tZERO's technology, including its patented technology. Although it is difficult to obtain reliable information about blockchain activities by companies that may be our competitors, they may include companies such as SharesPost, OpenFinance Network, Templum Inc., Coinbase, KoreConX, Blocktrade AG, Smart Valor, the Nasdaq Stock Market, Intercontinental Exchange, Circle, Ideanomics, CrowdEngine, Securitize, Harbor, Polymath, and other entities that are operating trading venues offshore or otherwise structured in an effort to avoid aspects of U.S. regulation.

To the extent that tZERO attempts to market its DLR Software, tZERO would be competing with virtually all of the largest broker dealers in the U.S., all of which have substantially greater resources than tZERO or Overstock, and some of which may generate substantial revenues and profits from the existing firmly entrenched system.

SpeedRoute and Pro Securities compete with a large number of broker dealers, many of which are substantially larger and have substantially greater financial resources than SpeedRoute, Pro Securities, tZERO or Overstock.

See "Risk Factors-Additional Risks Relating to Our tZERO Initiatives."

Strategic Initiatives

We have engaged Guggenheim Securities, LLC to help us identify and evaluate certain strategic initiatives. We are considering a range of potential transactions, including a sale of our retail business and additional equity or debt financings. Our Board of Directors continually discusses a variety of potential strategic and financial options and other changes to our business, but has not approved or made any determination to consummate any strategic transaction, and may choose not to do so in the foreseeable future or at all.

If we sell our retail business, the sale may not require approval by our stockholders under Delaware law. If we enter into an agreement to sell our retail business and determine that no vote of our stockholders is required, we do not expect to submit it to a vote. If we sell our retail business, we currently expect to retain all or substantially all of the after-tax proceeds of the sale for use in our blockchain initiatives.

Legal and Regulatory Matters

From time to time, we receive claims and become subject to regulatory investigations or other governmental actions, consumer protection, employment, intellectual property, and other commercial litigation related to the conduct of our business. We also prosecute lawsuits to enforce our legal rights. Regulatory investigations and other governmental actions as well as any litigation may be costly and time consuming and can divert our management and key personnel from our business operations. Regulatory investigations and other governmental actions as well as any such litigation may result in significant damages, associated costs, or equitable remedies relating to the operation of our business. Any such matters may materially harm our business, prospects, results of operations, financial condition, or cash flows.

These matters and other types of claims could result in legal expenses, fines, adverse judgments or settlements and increase the cost of doing business. They could also require us to change our business practices in expensive and significant

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ways. In addition, litigation could result in interpretations of the law that may limit our current or future business, require us to change our business practices, or otherwise increase our costs.

Additional litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could materially harm our business.

For further information, see (see Item 1A—"Risk Factors") and the information set forth under Item 15 of Part IV, "Financial Statements"—Note 12. Commitments and Contingencies, Legal proceedings and contingencies , contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.

Government Regulation

We are subject to a wide variety of laws, rules and regulations, some of which apply or may apply to us as a result of our retail business, some of which apply or may apply to us as a result of our Medici business, and others of which apply to us for other reasons, such as our status as a publicly held company or the places in which we sell certain types or amounts of products. Our retail business is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, and other services we offer. Existing and future laws and regulations may result in increasing expense and may impede our growth. Applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices.

Our efforts to expand our retail business outside of the U.S. expose us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, advertising practices, online services, the use of cryptocurrency, the importation of specified or proscribed items, importation quotas, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties.

Our Medici and tZERO businesses are subject to general business regulations and laws, including some of those described above, but are also affected by a number of other laws and regulations, including but not limited to, laws and regulations relating to money transmitters and money services businesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"), cryptocurrencies, public benefit corporations, provisions of various securities laws and other laws and regulations governing broker dealers, alternative trading systems and national securities exchanges, anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and a variety of other matters. Blockchain and distributed ledger platforms are recent technological innovations, and the regulation of securities tokens and other digital assets is developing. In the U.S., the businesses that we are working to develop are or may be subject to a wide variety of complex statutes and rules, most of which were implemented prior to the development of these technologies, and it is sometimes unclear whether or how various statutes or regulations apply.

The Token Trading System launched in January 2019 is subject to or affected by numerous laws and regulations. The Token Trading System relies on the PRO Securities ATS, which is subject to Regulation ATS as well as other regulations, and which utilizes the tZERO Platform, partnering with broker-dealers that are also subject to regulation by the SEC and FINRA, in order to facilitate private placement resales of tZERO Security Tokens to accredited investors in reliance upon an exemption from registration under Section 4(a)(7) of the Securities Act. The joint venture that tZERO and BOX Digital announced in June 2018 is seeking regulatory approvals that would enable the parties to operate a national securities exchange to trade security tokens. A national securities exchange, which will require approval from the U.S. Securities and Exchange Commission prior to beginning operations, will be subject to provisions of the Securities Exchange Act of 1934 and regulation substantially greater than that applicable to tZERO's current operations. In addition, depending on the digital assets traded, the U.S. Commodity Futures Trading Commission may consider the assets to be commodities or derivatives and subject to additional regulation. Certain aspects of our Medici business, including Bitsy's operations which were subsequently acquired by tZERO, are or may be subject to the state and federal laws and regulations applicable to money service businesses, including the requirements of FinCEN.


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See Item 1A—"Risk Factors—Additional Risks Relating to Our Medici Business" and "Additional Risks Relating to Our tZERO Initiatives."

Employees

At December 31, 2018 , we had approximately 2,060 full-time employees. We seasonally increase our workforce during our fourth quarter to handle increased workload in both our warehouse and customer service operations. We have never had a work stoppage and none of our employees are represented by a labor union. We consider our employee relationships to be good. Competition for qualified personnel in our industry is intense, particularly for software engineers and other technical staff.

Executive Officers of the Registrant

The following persons were executive officers of Overstock as of March 13, 2019 :
Executive Officers
 
Age
 
Position
Patrick M. Byrne
 
56
 
Chief Executive Officer, President, and Director
Jonathan E. Johnson III
 
53
 
President of Medici Ventures, Inc. and Director
Saum Noursalehi
 
40
 
Chief Executive Officer of tZERO Group, Inc. and Director
Carter P. Lee
 
49
 
Chief Administrative Officer
Dave Nielsen
 
49
 
Chief Sourcing & Operations Officer
Gregory J. Iverson
 
43
 
Chief Financial Officer
John Paul "J.P." Knab
 
38
 
Chief Marketing Officer
Kamelia Aryafar
 
33
 
Chief Customer & Algorithms Officer
Nate F. Auwerda
 
38
 
Chief Technology Officer
Seth A. Moore
 
36
 
Chief Strategy Officer
Sumit Goyal
 
34
 
Chief Digital Officer

Dr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since 1999, President since May 2018, and as Chairman of the Board of Directors from 2001 through 2005 and 2006 through 2014. Dr. Byrne also served as the Chief Executive Officer of tZERO, a subsidiary of Overstock, from July 2015 through May 2018 and also has served as Co-chairman of the Board of Directors for tZERO since October 2017. Dr. Byrne founded Overstock in 1999. From 1994 to the present, Dr. Byrne has served as a Manager of the Haverford Group, an investment company and an affiliate of Overstock. Dr. Byrne holds a bachelor's degree in Chinese studies from Dartmouth College, a master's degree from Cambridge University as a Marshall Scholar, and a doctorate in philosophy from Stanford University.

Mr. Jonathan E. Johnson III  has served as President of Medici Ventures since August 2016 and as a Director since 2013. Mr. Johnson also served as our Chairman of the Board of Directors from 2014 through 2017. Mr. Johnson joined Overstock in 2002 and previously served as our President, Executive Vice Chairman, Acting Chief Executive Officer, Senior Vice President, and General Counsel. Mr. Johnson holds a bachelor's degree in Japanese from Brigham Young University and received his law degree from the J. Reuben Clark, Jr. Law School at Brigham Young University.

Mr. Saum Noursalehi has served as the Chief Executive Officer of tZERO since May 2018. Mr. Noursalehi also served as our President of Retail from August 2016 through May 2018 and as a Director since May 2017. Mr. Noursalehi joined Overstock in 2005 and previously served as Chief Revenue Officer and Senior Vice President, Vice President of OLabs, Vice President of Product Development, and held roles in website, mobile and search engine optimization. Mr. Noursalehi holds a bachelor's degree in Computer Science from the University of Utah.

Mr. Carter P. Lee has served as our Senior Vice President of Technology and People Care since 2015 and was appointed as our Chief Administrative Officer during 2018. Mr. Lee joined Overstock in Overstock in 2001 and previously served as Vice President of Technology Operations and held other roles including Director of Internal Systems. Prior to joining Overstock, Mr. Lee was a Systems Engineer for Hospice of the Valley and Vice President of Technology for Motherboard Discount Center in Phoenix, AZ.

Mr. Dave Nielsen joined Overstock as our Chief Sourcing and Operations Officer in October 2018, having returned to Overstock after serving for three and half years as the Chief Executive Officer for Global Access. Mr. Nielsen originally joined Overstock in 2009 and previously served as our Senior Vice President of Business Development, Co-President, and Senior Vice

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President and General Merchandise Manager. Additionally, Mr. Nielsen also served as President and CEO of Old Town Imports, LLC, and also held several leadership positions with Payless ShoeSource, Inc. Mr. Nielsen received his bachelor's Degree in Business Management with an emphasis in Marketing from Brigham Young University.

Mr. Gregory J. Iverson (principal financial and accounting officer) joined Overstock as our Chief Financial Officer in April 2018. Prior to joining Overstock, Mr. Iverson spent eleven years at Apollo Education Group, Inc. (AEG), a global private-sector education company, culminating with his role as Chief Financial Officer. Mr. Iverson also served as the Director of Financial Reporting at US Airways Group, Inc. (subsequently acquired by American Airlines), and began his career in the audit and advisory practices of Arthur Andersen, LLP and Deloitte & Touche, LLP, in Phoenix, Arizona. Mr. Iverson graduated with a B.S. in business from the University of Idaho and is a Certified Public Accountant.

Mr. John Paul "J.P." Knab has served as our Senior Vice President of Marketing since March 2016, having returned to Overstock after serving for one-year as the Senior Vice President of Marketing, Merchandising and Business Development for U.S. Water Filters in St. Paul, Minnesota, and was appointed as our Chief Marketing Officer in August 2018. Mr. Knab originally joined Overstock in 2005 and previously served as our Vice President of Marketing and held other roles including Director of Merchandising and Director of Analytics. Mr. Knab holds an MBA with a Marketing emphasis and a bachelor's degree in Finance from Brigham Young University.

Dr. Kamelia Aryafar has served as our Chief Algorithms Officer since September 2018. Dr. Aryafar joined Overstock in 2017 and previously served as our Vice President, Head of Machine Learning, Data Science and AI, and Director of Engineering. Dr. Aryafar transitioned from academia to the industry as a senior machine learning scientist and lead at Etsy in 2013. Dr. Aryafar holds a Ph.D. and M.Sc. in computer science and machine learning from Drexel University and has published several papers in scientific journals.

Mr. Nate F. Auwerda was appointed as our Chief Technology Officer in November 2018. Mr. Auwerda joined Overstock in 2004 and previously served as Vice President of Technology, Senior Director of Technology, Director of Website Operations, Senior Manager of IT Security & Infrastructure as well as various other positions.

Mr. Seth A. Moore was appointed as our Senior Vice President of Analytics in February 2017 and later appointed as Senior Vice President of Strategy in December 2017, Chief of Staff to the CEO in October 2017, and later appointed Chief Strategy Officer during 2018. Mr. Moore joined Overstock in 2006 and previously served as Vice President of OLabs, Vice President of Analytics, and Vice President of Website Marketing. Mr. Moore holds a bachelor's degree in Political Science from Brigham Young University.

Mr. Sumit Goyal was appointed as our Chief Digital Officer in November 2018. Mr. Goyal joined Overstock in 2011 and previously served as our Chief Technology Officer as well as various other positions in technology and software development. Before joining Overstock.com, Mr. Goyal held software engineering and programmer positions at eHarmony.com, eBay, Goldman Sachs, and IBM. Mr. Goyal holds a bachelor's degree in Computer Science from the National Institute of Technology Kurukshetra.

None of our officers has an employment agreement or any specific term of office.

Available Information

We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available free of charge through the Investor Relations section of our main website, www.overstock.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Internet Website and the information contained therein or connected thereto are not a part of or incorporated into this Annual Report on Form 10-K.


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ITEM 1A. RISK FACTORS

Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business, prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on the market price of our securities. Many of the risks we face involve more than one type of risk. Consequently, you should read all of the risk factors below carefully before making any decision to acquire or hold our common stock or preferred stock. Virtually all of the risks of holding our common stock are also risks for holding our Series A Preferred Stock and our Series B Preferred Stock.

Holders of, and potential investors in, our Series A Preferred Stock should also read "Additional Risks Related Primarily to our Series A Preferred Stock," and "Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock," below.

Holders of, and potential investors in, our Series B Preferred Stock should also read "Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock," below.

Holders of, and potential investors in, the tZERO Security Tokens issued by tZERO Group, Inc. should also read "Additional Risks Related to our tZERO Security Tokens," below.

Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below, and all other information in this Form 10-K and in any reports we file with the SEC after we file this Form 10-K, before deciding whether to purchase or hold our securities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business. The occurrence of any of the risks described in this Form 10-K could harm our business. The trading price of our securities could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.

Risks Relating to Our Company and to Our Current Review of Strategic Initiatives

We have a history of significant losses. If we do not achieve profitability or generate positive cash flow from operations in the near future, our ability to continue in business will depend on our ability to raise additional capital, obtain financing or monetize significant assets, and we may be unable to do so.

We have a history of significant losses and our losses have accelerated in recent years, particularly 2018, and we expect to incur operating and net losses in the foreseeable future. Net cash used in operating activities were $138.9 million during 2018, and at December 31, 2018 our accumulated deficit was $458.9 million . Our losses have accelerated in recent years, particularly in 2018, and we may not be able to achieve profitability promptly or at all. We are working to improve the efficiency of our operations but may be unable to do so. Recent staff reductions we have made and additional cost reductions we may implement in the future may adversely affect our business operations. If we are unable to successfully manage our business while reducing our expenses, our ability to continue in business could depend on our ability to raise sufficient additional capital, obtain sufficient financing, or sell or otherwise monetize significant assets such as our corporate headquarters. We do not expect to be able to obtain significant debt financing in the near future. Additionally, we may not be able to raise capital on acceptable terms or at all. The occurrence of any of the foregoing risks would have a material adverse effect on our financial results, business and prospects.

We have significant negative working capital. 

Our net working capital (current assets less current liabilities) was a negative  $26.2 million at December 31, 2018 compared to a positive $50.5 million at December 31, 2017 . Additionally, any significant declines in our revenues could result in decreases in our working capital, which would further reduce our cash balances. Our failure to generate sufficient revenues or profits or to obtain additional financing or raise additional capital could have a material adverse effect on our operations and on our ability to meet our obligations as they become due. The occurrence of any of the foregoing risks would have a material adverse effect on our financial results, business and prospects.


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We do not have access to any credit facility or other arrangement for borrowing funds.

We currently do not have access to a credit facility or to the proceeds of any mortgage indebtedness or other secured or unsecured indebtedness for borrowed money. We may be unable to obtain financing on favorable terms, or at all. Our lack of any credit facility or other ready access to borrowed funds could have a material adverse effect on our ability to fund additional losses in the near future, or to respond to unexpected cash requirements or other liquidity issues that we may face from time to time. Our inability to generate sufficient cash flow from operations or obtain financing on acceptable terms would have a material adverse effect on our financial results, business and prospects.

We are subject to the risk of possibly becoming an investment company under the Investment Company Act.

The Investment Company Act regulates certain companies that invest in, hold or trade securities. Primarily as a result of a portion of our assets consisting of minority investment positions, we are subject to the risk of inadvertently becoming an investment company. Because registration under the Investment Company Act would make it impractical for us to operate our business, we need to avoid becoming subject to the registration requirements of the Investment Company Act. To do so, we may structure transactions in a less advantageous manner than if we did not have Investment Company Act concerns, or we may avoid otherwise economically desirable transactions and/or strategic initiatives due to those concerns. In addition, events beyond our control, including significant appreciation or depreciation in the value of certain of our holdings or adverse developments with respect to our ownership of certain of our subsidiaries, could result in us inadvertently becoming an investment company. If it were established that we were an investment company, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, in an action brought by the SEC, that we would be unable to enforce contracts with third parties or that third parties could seek to obtain rescission of transactions with us undertaken during the period it was established that we were an unregistered investment company. If it were established that we were an investment company, it would have a material adverse effect on our business and financial operations and our ability to continue our business.

In February of 2018, we and tZERO each received notice that the staff of the SEC's Division of Enforcement is conducting an investigation and has requested information regarding the tZERO security token offering.

In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we and our affiliates, including Medici Ventures and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December 2018, we received a follow-up request for information. We are cooperating fully with the SEC in connection with its investigation, which will require the time and attention of tZERO and our personnel and may have an adverse effect on our ability to focus attention on our businesses and our ability to raise capital. In addition, the outcome of the investigation could result in negative publicity for tZERO or us and may have a material adverse effect on us or on the current and future business ventures of tZERO.

We are exploring strategic initiatives, and decisions we make could have material adverse effects on our business and the market price of our common stock.

We have been and are currently exploring certain strategic initiatives, and decisions we make could change our business fundamentally and increase the risks and uncertainties of our business substantially. We are considering a range of potential transactions, including a sale of our retail business and additional equity or debt financings. There can be no assurance that we will pursue or consummate any strategic transaction or, if consummated, that any such transaction will ultimately be favorable to the Company and its stockholders. Any such transaction could materially adversely affect our business and financial results. In addition, our exploration of strategic and financing options has required and will continue to require significant time and attention by our management, and the incurrence of significant expenses. Further, our efforts to keep investors informed about our consideration of strategic alternatives may result in distraction and unrest among our employees, which may adversely affect employee engagement, morale and retention and which could have a material adverse effect on our financial results, business and prospects.

Our recent reduction in workforce may prevent us from executing initiatives to improve the performance of our retail business effectively or at all.

We have been and are currently implementing certain initiatives to improve the performance of our retail business, and our recent reduction in workforce could prevent us from engaging in certain initiatives we had previously considered and could prevent us from executing such initiatives effectively. At December 31, 2018, our workforce consisted of approximately 2,060 employees. At March 5, 2019, our workforce had been reduced by approximately 250, or approximately 12%, and consisted of

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1,810 employees. The reduction in our workforce could prevent us from engaging in certain initiatives to improve the performance of our retail business, due to an insufficiency of workforce size or an insufficiency of certain required skills, and could prevent us from executing initiatives effectively, which could have a material adverse effect on our financial results, business and prospects.

If we sell our retail business, our revenues will decrease substantially, we will need to develop new businesses and sources of revenue, and our business, financial results and prospects may be materially adversely affected.

If we sell our retail business in order to focus on our efforts on our Medici initiatives, our revenues would decrease to an insignificant amount. Our retail business is a relatively mature and predictable business compared to our Medici initiatives, which have a short history, minimal revenues, significant expenses, significant losses and significant uncertainties, and conduct business in a new and rapidly changing industry. We would continue to bear most of the expenses we currently bear as a publicly held company but would have to build a new business and develop new sources of revenue based on our blockchain initiatives, and there is no assurance that we would be able to do so or, even if we could do so, that our new business could become profitable.

If we sell our retail business, we do not expect to make any distribution to stockholders.

If we sell our retail business for cash, we currently expect to retain all of the after-tax proceeds of the sale for use in our blockchain initiatives. The decision to retain all of the after-tax proceeds, or to declare a dividend, implement a stock repurchase program, make one or more issuer tender offers or take any other similar action, would be subject to the discretion of our Board of Directors, and would depend on the factors the Board deems relevant at the time. Relevant factors would likely include our capital resources, liquidity, operating results, internal projections and plans at the time. We have incurred significant losses recently, and we have utilized a significant amount of cash in funding of our Medici and tZERO initiatives. We also have plans for Medici and tZERO that will require significant additional funding, and we do not currently expect to make any distribution to stockholders even if we sell the retail business. As a result, the market price of our securities could decrease substantially.

A sale of our retail business might not be subject to a stockholder vote.

Whether a sale of our retail business would be subject to a stockholder vote would depend primarily on whether a vote is required by applicable law and whether a buyer would require us to submit it to a vote regardless of the requirements of applicable law. If we make a decision to sell our retail business, we and our Board will evaluate the applicable requirements and other factors we and our Board then deem relevant, but at present we do not expect to submit any transaction to a stockholder vote unless we are required to do so, whether by applicable law or otherwise. If we sell our retail business without submitting the transaction to a vote, we may face claims asserting that we should have submitted it to a vote. In addition, we may not sell our retail business in the foreseeable future or at all. Any developments, lack of developments (or announcements about any developments or lack of developments) could cause the trading prices of our securities to decrease.

If we sell our retail business, we could incur a substantial corporate level income tax liability.

If we sell our retail business in a transaction taxable to the Company, the corporate level income tax liability to the Company would depend in part on the sales price but could be substantial. If we experience an ownership change due to stock sales by our significant stockholders, the amount of net operating losses or credits that can be used to offset the tax on any gain may be limited. Depending on the sales price and limits that are triggered by an ownership change, any net operating losses and credits we have that might be used to reduce the income tax liability to the Company may be unlikely to reduce the tax liability by a significant amount.

If we sell our retail business, our Compensation Committee may accelerate the vesting, in whole or in part, of some or all outstanding restricted stock units under our Equity Incentive Plan.

If we sell our retail business, the Compensation Committee of our Board of Directors may accelerate the vesting, in whole or in part, of some or all outstanding restricted stock units ("RSUs") under our 2005 Equity Incentive Plan. Any such determination would be subject to the discretion of the Compensation Committee and such factors as the Compensation Committee might then deem relevant. Any such acceleration would result in an increase in the number of shares outstanding and would dilute stockholders' ownership of our company.


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Our discussions with potential bidders for our retail business could result in the compromise of our intellectual property.

As a consequence of our discussions with potential bidders for our retail business, it may be possible for potential bidders to misappropriate intellectual property and other confidential information from us, which could have a material adverse effect on our financial results, business and prospects.

If we sell our retail business in order to focus on our blockchain initiatives and related efforts, risks relating to our Medici businesses, including our tZERO initiatives, that may be immaterial to us now would likely each become a material risk to us.

If we sell our retail business in order to focus on our blockchain initiatives and related efforts, we would immediately become a much smaller company than we are now. Consequently, risks relating to our Medici businesses, including our tZERO initiatives, which may currently be immaterial to us, would in all likelihood each become material risks to us. See "Additional Risks Relating to Our Medici Business," and "Additional Risks Relating to Our tZERO Initiatives" below.

We engage in related party transactions, which could result in conflicts of interest involving our management.

We engage in related party transactions with members of our management and Board of Directors, including with Patrick Byrne and Saum Noursalehi and their affiliates. We also own interests in businesses, including tZERO, in which one or more of our directors, officers and other employees own interests. Related party transactions present conflicts of interest which could have a material adverse effect on our financial results, business and prospects.

Our ownership of less than 100% of tZERO and other subsidiaries may cause conflicts of interest.

Our wholly-owned subsidiary Medici Ventures owns 80% of the outstanding common stock of tZERO, and tZERO employees, former employees and others own the balance of the shares. tZERO has issued employee stock options that may further dilute our ownership interest. In addition, tZERO may engage in capital raising activities in the future that could further dilute our ownership interest. To that end, in March 2019, we disclosed that we have executed a Memorandum of Understanding regarding a potential transaction involving an equity investment of up to $100 million in tZERO by GSR Capital and Makara Capital, and are in continuing discussions in furtherance thereof. We cannot be sure that we will be able to complete any such transaction on the contemplated terms or on the desired timeframe, if at all. Medici Ventures also has issued employee stock options that may result in our owning less than 100% of Medici Ventures in the future, which would also reduce our effective interest in tZERO. The boards of directors of tZERO and Medici Ventures must consider the interests of all of their stockholders, and the interests of the individual stockholders may differ from our interests. Any significant divergence between our interests and the interests of other stockholders, who are also likely to be employees, of our majority owned subsidiaries, could result in disagreements regarding business matters and could have an adverse effect on employee morale and on our business.

The options granted by Medici Ventures and the options granted by tZERO could reduce our effective ownership of each of them significantly.

Medici Ventures has granted compensatory options under its stock option plan and sold warrants to purchase Medici common stock. If all of the currently outstanding Medici Ventures options were vested and exercised and all of the currently outstanding warrants were exercised, our ownership of Medici Ventures would decrease from 100% to 90%.

tZERO has granted compensatory options under its equity incentive plan. If all of the currently outstanding tZERO options were vested and exercised, Medici Ventures’ ownership of tZERO would decrease from 80% to 76%.

If all of the currently outstanding Medici Ventures options and warrants and all of the currently outstanding tZERO options were exercised, our effective indirect ownership of tZERO would decrease from 80% to 69%.

An equity financing by tZERO, whether involving GSR Capital and/or Makara Capital or otherwise, could accelerate the vesting of the options granted by tZERO.

The tZERO equity incentive plan requires the administrator of the plan to accelerate, vest, or cause the lapse of restrictions applicable to awards outstanding under the plan upon a “change in control” as defined in the plan. For purposes of the tZERO plan, a “change in control” includes Overstock and any entity or entities directly or indirectly controlled by Overstock becoming the legal or beneficial owner of tZERO shares having less than a majority of the total voting power of the outstanding stock of tZERO. As a result, a sale of tZERO shares, whether involving GSR Capital and/or Makara Capital or

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otherwise, could accelerate the vesting of the options granted by tZERO. Further, the exercise of options or warrants issued by Medici Ventures and/or the exercise of vested options issued by tZERO could contribute to or cause the accelerated vesting of any then unvested tZERO options.

Our subsidiary Medici Land Governance, Inc. is a public benefit corporation .

Our subsidiary Medici Ventures has formed Medici Land Governance, Inc. ("MLG") as a public benefit corporation under Delaware law. Directors of traditional corporations, including Overstock and Medici Ventures, are required to make decisions they believe to be in the best interests of their stockholders. The directors of MLG are required by Delaware law to manage MLG in a manner that balances (1) MLG stockholders' pecuniary interests, (2) the best interests of those materially affected by MLG conduct, and (3) MLG public benefit purpose, which is to promote full financial inclusion, economic advancement, and enfranchisement of individuals, by creating systems using blockchain and other technologies that help individuals prove rightful ownership of assets, capitalize their assets, and establish a formal identity. As a result, MLG may not have the same focus on increasing stockholder value that Overstock and Medici Ventures have, and the duties of the officers and directors of MLG, some of whom also are or will be officers and/or directors of Overstock and/or Medici Ventures, may conflict with the duties of the officers and directors of Medici Ventures and Overstock. Even in the absence of common directors, conflicts of interest may arise.

MLG does not have a proven business model, does not have revenues or profits, and may require additional capital.

MLG was formed in mid-2018 and is an early stage company that currently does not generate revenues or profits. Its current projects are being done as pilot projects without charge at MLG’s expense to demonstrate MLG’s capabilities and develop its reputation. Although MLG intends to generate revenues and profits in the future, it has not yet developed a business model. If MLG cannot generate revenues and profits, MLG will require additional capital, which may have a material adverse effect on our financial results, business and prospects.

Strategic relationships, joint ventures, purchases of strategic interests in other companies and acquisitions of other companies involve numerous risks, including increased regulatory and integration risks.

We have developed strategic relationships, entered into joint ventures, purchased strategic interests in other companies, and acquired other companies, and we expect to pursue and engage in similar types of activities in the future. Each of these types of business transactions involve numerous risks, including difficulties in the evaluation of business opportunities and risks, including regulatory and integration risks, as well as difficulties in the assimilation of acquired operations and products. These types of transactions can also result in the diversion of management's attention from other business matters, employee retention issues, and the risk of liability for liabilities of acquired companies. We may not be able to successfully integrate businesses, operations, personnel, services, products or other assets that we have acquired or may acquire in the future. Further, acquisitions may also create a need for additional accounting, tax, compliance, documentation, risk management and internal control procedures, and may require us to hire additional personnel to implement, perform and/or monitor such procedures. To the extent our procedures are not adequate to appropriately implement, perform and/or monitor all necessary procedures relating to any new or expanded business, we could be exposed to a material loss or regulatory sanction. In addition, we may be unable to sell or otherwise monetize any of the interests or companies or other assets or rights we have acquired or may acquire in the future. We also may be unable to maintain our strategic relationships, including those with joint venture partners, or develop new strategic relationships. The occurrence of any of the foregoing which could have a material adverse effect on our financial results, business and prospects.

The potential investment in tZERO contemplated by the Memorandum of Understanding we announced in March 2019 with GSR Capital and Makara Capital may not occur.

In March 2019, we disclosed that we had executed a Memorandum of Understanding regarding a potential equity investment of up to $100 million in tZERO to be co-led by GSR Capital and Makara Capital, subject to due diligence, negotiation of binding contracts and regulatory approval. We may not be able to reach agreement on the terms of any such investment. Even if we are able to reach agreement on the terms and enter into a definitive agreement regarding the potential investment, the transaction may not close. Our efforts to reach an agreement and close a transaction will continue to take time and attention from our senior executives, which may have an adverse effect on our business, and if the transaction fails to occur, it may have a material adverse effect on our financial results, business and prospects.


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We may have additional exposure to claims under Delaware's Abandoned Property Law.

In September 2018 we lost a jury trial in Delaware brought on Delaware's behalf alleging that we had violated Delaware's unclaimed property laws by failing to report and turn over to Delaware certain unused gift card balances. The time period covered by the lawsuit was 2004 through 2007. The jury returned a verdict, which we expect to result in a judgment against us of approximately $7.3 million plus attorneys' fees and costs. We may have additional exposure for the time period 2008 through 2014.

We have significant deferred tax assets, and we may not be able to realize these assets in the future.

We have established a valuation allowance for our net deferred tax assets, primarily due to realized losses and uncertainty regarding our future taxable income. Determining whether a valuation allowance for deferred tax assets is appropriate requires significant judgment and an evaluation of all positive and negative evidence. At each reporting period, we assess the need for, or the sufficiency of, a valuation allowance against deferred tax assets. We intend to maintain a valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

We are currently subject to claims that we have infringed intellectual property rights of third parties and may be subjected to additional infringement claims in the future.

We are currently and may in the future be subject to claims that we have infringed the intellectual property rights of others, by offering allegedly infringing products or otherwise. We have contested and expect to continue to contest claims we consider unfounded rather than settling such claims, even when we expect the costs of contesting the claims to exceed the cost of settlement. Any claims may result in significant expenditure of our financial and managerial resources and may result in us making significant damages or settlement payments or changes to our business. We could be prohibited from using software or business processes, or required to obtain licenses from third parties, which could be expensive or unavailable. Any such difficulties could have a material adverse effect on our financial results, business and prospects.

We may be unable to protect our proprietary technology and to obtain trademark protection for our marks.

Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, affiliates, and others to establish and protect our proprietary rights, including the law pertaining to trade secrets. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property or trade secrets without authorization. In addition, we cannot ensure that others will not independently develop similar intellectual property. Third parties have in the past recruited and may in the future recruit our employees who have had access to our proprietary technologies, processes and operations. These recruiting efforts expose us to the risk that such employees and those hiring them will misappropriate and exploit our intellectual property and trade secrets. We may be unable to protect it, in the United States or elsewhere, which could have a material adverse effect on our business. Although we have registered and are pursuing the registration of our key trademarks in the United States and some other countries, some of our trade names may not be eligible to receive registered trademark protection. In addition, effective trademark protection may not be available or we may not seek protection in every country in which we market or sell our products and services, including in the United States. Our competitors might adopt product or service marks similar to our marks or might try to prevent us from using our marks. Any claim by another party against us or customer, confusion related to our trademarks, or our failure to obtain trademark registration, could have a material adverse effect on our financial results, business and prospects.

If one or more states successfully asserts that we are liable for the collection of sales or other taxes for periods prior to the Supreme Court's recent decision in South Dakota v. Wayfair, our business could be harmed.

Prior to the Supreme Court's recent decision in South Dakota v. Wayfair, in which we were a named party, to overturn its 1992 decision in Quill v. North Dakota, we generally did not collect sales or other similar taxes on sales of goods into states where we had no duty to do so under Quill. If any jurisdiction where we did not collect sales or other taxes successfully asserts that we should have done so, it could have a material adverse effect on our business, regardless of the ultimate outcome.

A subsidiary of ours owns the land on which we built our headquarters, and we may incur environmental expense and liabilities.

In 2014, our wholly-owned subsidiary O.com Land, LLC purchased land near Salt Lake City, Utah on which we have built our new headquarters. The land is part of the Midvale SLAG Superfund Site ("Site"), a former Comprehensive

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Environmental Response, Compensation and Liability Act ("CERCLA") superfund site. O.com Land, LLC is required to follow certain requirements of CERCLA and the consent decree governing remediation of the Site, and its failure to do so could expose us to material environmental liabilities.

Additional Risks Relating to Our tZERO Initiatives

Risks Related to tZERO's Business

tZERO has a limited operating history, which makes it hard to evaluate its ability to generate revenue through operations, and at the date of this filing, tZERO has not generated revenue from any commercially available blockchain-based application.

tZERO was formed in 2014 to develop blockchain and financial technology as part of Overstock's Medici initiatives. tZERO's limited operating history makes it difficult to evaluate its current business and future prospects. tZERO has encountered, and will continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries, including challenges in forecasting accuracy, determining appropriate uses of its limited resources, gaining market acceptance, managing a complex regulatory landscape and developing new products. tZERO's current operating model may require changes in order for it to scale its operations efficiently. Investors in our common stock should consider tZERO's business and prospects in light of the risks and difficulties it faces as an early-stage company focused on developing products in the field of financial technology. To date, tZERO has focused on developing its business and exploring opportunities for novel applications of blockchain technology. tZERO has not generated revenue from any commercially available blockchain-based applications. tZERO has generated limited revenue and has accumulated losses since its inception. As such, tZERO's has historically been dependent upon continued financial support from us. If we are unable to generate positive cash flow in our retail business, raise additional capital, obtain financing, or sell or otherwise monetize significant assets, we may be unable to continue funding tZERO at the rate or levels we would otherwise do, which could have a material adverse effect on us and on the current and future business of tZERO.

tZERO may not successfully develop, launch, market, or sell its DLR Software.

tZERO anticipates that its first commercially available blockchain-based product will be its DLR Software. The DLR Software is currently in customer production testing, which is being conducted by a third party, and tZERO has not yet entered into any commercial licenses with any licensees. The DLR Software is intended to help broker-dealer licensees with stock inventory to both load and manage their inventory in order to assist short sellers of public securities in establishing that they have located available shares in the U.S. public securities market prior to effecting short sales. The DLR Software is intended to enable licensees to create a blockchain-based record of the shares that the licensee has made available for "locates" using customizable DLR Software functionality and of the daily purchases of the right to "locate" specifically identified shares for purposes of compliance with regulatory requirements. Although tZERO believes that the DLR Software provides broker-dealers with a better solution than the system currently in use for identifying "locates," the existing system is firmly entrenched and is controlled by firms with substantially greater resources than tZERO or Overstock. tZERO may not successfully develop, launch, market or sell its DLR Software.

The commercial viability of the DLR Software is dependent on the ability of broker-dealer licensees to offer the DLR Software as an effective means of satisfying the regulatory obligations of those effecting short sales. Regulation SHO under the Exchange Act ("Regulation SHO"), as interpreted and implemented by the SEC, is the principal regulation governing short sales. In preliminary discussions with regulators regarding the application of DLR Software, certain members of the SEC Staff (the "Staff") have expressed concerns regarding whether locates issued utilizing the DLR Software would provide customers of broker-dealer licensees with a valid locate for purposes of Regulation SHO unless certain conditions were satisfied by the issuing broker-dealers. The broker-dealer licensees of DLR Software, as the parties issuing locates for purposes of Regulation SHO, will be responsible for ensuring that locates issued using the DLR Software comply with all applicable regulations and satisfy the requirements of Regulation SHO. In the event that compliance with regulatory obligations in utilizing DLR Software proves too burdensome to broker-dealer licensees, the DLR Software may not gain market acceptance among broker-dealers.

In addition, the SEC and other regulatory and self-regulatory authorities may in the future adopt additional rules and regulations, adopt new or modified interpretations of existing regulations, or take other actions, that may impact those engaging in short selling activity or adversely affect the ability of short-selling customers of broker-dealer licensees to rely on locates generated by the DLR Software in effect at the time. Any governmental or regulatory action that restricts the ability of investors to effect short sales, or to do so in reliance on locates generated by the tZERO DLR Software, could adversely affect the commercial viability of the DLR Software.


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Moreover, tZERO will need to devote significant resources to license sales and marketing efforts in order to convince broker-dealers that licensing the DLR Software will increase their revenues from their stock lending operations and to persuade large pension funds and other entities that hold large amounts of publicly traded securities that providing inventory supply to broker-dealers utilizing the DLR Software will provide access to additional revenue opportunities. tZERO will need to build a sales and marketing function and staff to effectively market the DLR Software. tZERO may be unable to do so, and any sales and marketing function and staff it builds may be unable to successfully market the DLR Software. Further, tZERO may have overestimated the size of the pension crisis and the potential market for the DLR Software, the potential demand for the DLR Software, and the possibility that it will be able to market the DLR Software to potential licensees.

Once the DLR Software is released for commercial licensing, tZERO may need to make changes to the specifications of the DLR Software for any number of reasons. In the event that tZERO is unable to develop the DLR Software in a way that realizes those specifications, it is possible that the DLR Software may never generate significant revenue or become profitable for tZERO. Furthermore, despite good faith efforts to develop and complete the launch of the DLR Software and subsequently to maintain it, it is still possible that the DLR Software will experience malfunctions or otherwise fail to be adequately developed or maintained, which may negatively impact sales and marketing efforts. There can be no assurance that the DLR Software will ever generate significant revenue or become profitable for tZERO.    

tZERO continues to develop new and existing trading platforms for the Series A Preferred, the tZERO Security Tokens and, ultimately, other issuer's digital securities, but to date has only two Token Trading Systems in operation, both by PRO Securities.

tZERO continues to develop new and existing Token Trading Systems to trade digital securities, including the Series A Preferred, the tZERO Security Tokens, and, ultimately, other issuer's securities tokens. At the date of this filing, only two Token Trading Systems are operational-in December 2016, the PRO Securities ATS, utilizing the tZERO Platform, partnering with Keystone Capital Corporation ("Keystone") and ETC, each SEC-registered broker-dealers and FINRA members, began facilitating trading in the Series A Preferred, and in January 2019, the PRO Securities ATS, again utilizing the tZERO Platform, partnering with Dino and ETC, each SEC-registered broker-dealers and FINRA members, began facilitating private placement resales of tZERO Security Tokens to accredited investors in reliance upon an exemption from registration under Section 4(a)(7) of the Securities Act. Separately, in June 2018, tZERO and BOX Digital announced that they had entered into a joint venture intended to develop the Exchange with regulatory approvals that would enable the Exchange to trade security tokens. The Exchange will require approval from the U.S. Securities and Exchange Commission prior to beginning operations. The development of these and any other Token Trading Systems implicates complex technological considerations and raises numerous legal and regulatory issues that will need to be addressed-likely, in consultation with tZERO's broker‑dealer subsidiaries' regulators. As a result of these technological, legal and regulatory considerations, new Token Trading Systems may never be developed and, if developed, may (as may any existing Token Trading System), for a variety of technological, legal and regulatory reasons, never become (or remain) operational. If tZERO is unable to successfully develop viable Token Trading Systems, tZERO's business plans would be materially adversely affected. See "Risks Related to the Development of the Token Trading Systems" below.

tZERO intends to offer services to companies considering or pursuing initial security token offerings but has not yet been engaged to do so.

tZERO intends to offer services ("issuer services"), including offering an issuer services platform, to companies considering or pursuing initial security token offerings. To date, tZERO has not been engaged to provide issuer services to any other company considering or pursuing an initial security token offering, and there can be no assurance that tZERO will launch its issuer services platform or be engaged to provide any issuer services in the future or that any issuer services, if provided, will be profitable. If tZERO is engaged to provide any issuer services, tZERO could face claims from any dissatisfied clients and could incur liabilities in rendering any issuer services, any of which could also damage our reputation and adversely affect other parts of our business.

PRO Securities and SpeedRoute, two subsidiaries of tZERO that currently generate substantially all of tZERO's revenues, are registered broker-dealers and are subject to extensive regulation.

Broker-dealers are subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization (“SRO”) rules. PRO Securities and SpeedRoute are registered with the SEC as broker‑dealers under the Exchange Act and in the states in which they conduct securities business and are members, and subject to the rules, of FINRA. In addition, PRO Securities owns and operates the PRO Securities ATS, which has filed a Form ATS with the SEC notifying the SEC of its activities as an alternative trading system. PRO Securities and SpeedRoute are subject to regulation, examination,

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investigation and disciplinary action by the SEC, FINRA and state securities regulators, as well as other governmental authorities and SROs with which they are registered or licensed or of which they are a member.

PRO Securities and SpeedRoute currently generate substantially all of tZERO's revenues. Any failure of PRO Securities or SpeedRoute to comply with all applicable rules and regulations could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.

Our broker dealers and tZERO are involved in ongoing discussions with regulatory authorities.

Our broker dealers, PRO Securities and SpeedRoute, and tZERO have been and remain involved in ongoing oral and written communications with regulatory authorities in connection with ongoing examinations, inquiries, or investigations. Any failure of our broker dealers or tZERO to satisfy FINRA, the SEC, or any other regulatory authority with which they must comply could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.

Technology on which tZERO relies for its operations, including the technology underlying the Token Trading Systems, may not function properly.

The technology on which tZERO and its licensees rely, including the technology underlying the Token Trading Systems, may not function properly, which would have a material adverse effect on tZERO's plans, operations and financial condition. Although the tZERO Platform has worked for the Series A shares and the tZERO Security Tokens, trading in these securities has been extremely limited, and consequently the tZERO Platform has not been tested with significant trading volume. If the technology does not work as anticipated, there may be no alternative available. The importance of the technology to tZERO's operations means that any problems in its functionality would have a direct materially adverse effect on tZERO's plans and expectations for revenues from blockchain applications. The technology may malfunction because of internal problems or as a result of cyber-attacks or external security breaches. Any such technological problems would have a material adverse effect on tZERO's prospects.

Acquisitions tZERO has made and may make will increase costs and regulatory and integration risks.

From time to time tZERO has purchased interests in or acquired other businesses or the assets of other businesses and may do so again in the future. Integrating an acquired business or its assets involves a number of risks and financial, managerial and operational challenges. tZERO may incur significant expenses in connection with purchases or acquisitions it has made in the past or may make in the future. Further, acquisitions may also create a need for additional accounting, tax, compliance, documentation, risk management and internal control procedures, and may require tZERO to hire additional personnel to implement, perform and/or monitor such procedures. To the extent tZERO's procedures are not adequate to appropriately implement, perform and/or monitor all necessary procedures relating to any new or expanded business, we could be exposed to a material loss or regulatory sanction. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.

tZERO's acquisition of Bitsy Inc. may expose us to additional risks.

Effective January 2019, tZERO purchased the remaining 67% interest in Bitsy, Inc. for $8 million, bringing our total equity interest in Bitsy, Inc. to 100%. Bitsy, Inc., is a U.S.-based company founded and partially owned by Medici Ventures' former chief operating officer and general counsel, and current president of tZERO, Steve Hopkins. In September 2018, Bitsy announced that it had begun a limited beta launch of a digital wallet service intended to create a bridge between traditional fiat currencies and cryptocurrencies. Various aspects of the business that Bitsy is engaging in are heavily regulated. Virtually every state in the U.S. regulates money transmitters and money services businesses. In some states the licensing requirements and regulations expressly cover companies engaged in digital currency activities; in other states it is not clear whether or how the existing laws and regulations apply to digital currency activities. These licenses and registrations subject companies to various anti-money laundering, know-your-customer, record-keeping, reporting and capital and bonding requirements, limitations on the investment of customer funds, and inspection by state and federal regulatory agencies. Bitsy has registered with FinCEN and intends to obtain all licenses it is required to obtain. Under U.S. federal law, it is a crime for a person, entity or business that is required to be registered with FinCEN or licensed in any state to fail to do so. Further, under U.S. federal law, anyone who owns all or part of an unlicensed money transmitting business may be subject to civil and criminal penalties.


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Additional Risks Related to our tZERO Security Tokens

The IRS may disagree with our characterization of the tZERO Security Token offering, which would have a material adverse effect on us.

Although we have taken the position that the sale of the tZERO Security Tokens in the security token offering was a sale of equity for tax purposes, if the IRS disagrees with our characterization and instead requires us to treat the proceeds as income to us for federal income tax purposes, this would reduce our federal net operating loss carryforwards by approximately $104.8 million as a result of the security token offering. In addition, if we are required to treat the proceeds of the security token offering as a liability rather than equity for accounting purposes, that would reduce tZERO's net book value compared to equity treatment.

We are subject to the risks of holding tZERO Security Tokens and the risk that we will be unable to sell the tZERO Security Tokens.

As part of tZERO's Security Token offering, we elected to accept tZERO Security Tokens in payment of $30 million of tZERO's indebtedness to us. As a holder of restricted securities, we therefore are subject to all of the risks of holding the tZERO Security Tokens, including the risk that we will be unable to publicly resell any of the tZERO Security Tokens unless tZERO registers our resale for us under the Securities Act of 1933, as amended. We do not have any contractual rights to require tZERO to do so.

The tZERO Security Tokens may be subject to registration under the Exchange Act if tZERO has assets above $10 million and more than a statutory amount of registered token holders, which would increase tZERO's costs significantly and require substantial attention from tZERO's management.

Companies with total assets above $10 million and more than 2,000 holders of record of their equity securities, or 500 holders of record of its equity securities who are not accredited investors, at the end of their fiscal year must register that class of equity securities with the SEC under the Exchange Act. If tZERO is required to register the tZERO Security Tokens with the SEC under the Exchange Act, it would be a laborious and expensive process. Furthermore, if such registration takes place, tZERO would have materially higher compliance and reporting costs going forward.

Risks Related to the Development of the Token Trading Systems

Development of Token Trading Systems pose financial, technological, and regulatory challenges and tZERO may not be able to successfully develop, market and launch any particular Token Trading System.

The development of a Token Trading System requires significant capital funding, expertise of tZERO's management and time and effort in order to be successful. For any particular Token Trading System, tZERO may have to make changes to the specifications for any number of reasons or tZERO may be unable to develop the Token Trading System in a way that realizes those specifications or any form of a functioning network. A Token Trading System, even if successfully developed and maintained, may not meet investor expectations-for example, there can be no assurance that a Token Trading System will provide less expensive or more efficient trading than is possible on currently available trading platforms for traditional securities (or even other Token Trading Systems for digital securities). Furthermore, a Token Trading System may experience malfunctions or otherwise fail to be adequately developed or maintained, which may negatively impact that Token Trading System and the digital securities traded on that Token Trading System.

tZERO may not have or may not be able to obtain the technical skills, expertise, or regulatory approvals needed to successfully develop any particular Token Trading System and progress it to a successful launch. While tZERO has sought to retain and continue to competitively recruit experts, there may, from time to time, be a general scarcity of management, technical, scientific, research and marketing personnel with appropriate training to develop and maintain development of Token Trading Systems. In addition, there are significant legal and regulatory considerations that will need to be addressed in order to develop and maintain each Token Trading System, including the qualifications of licensees operating each Token Trading system, and addressing such considerations will require significant time and resources. There can be no assurance that tZERO will be able to develop Token Trading Systems that fully achieve tZERO's goals and satisfy the complex regulatory requirements applicable to SEC-registered exchanges and/or permitted alternative trading systems. If tZERO is not successful in its efforts to develop Token Trading Systems that are compliant with all regulatory and legal requirements and to demonstrate to users the utility and value of Token Trading Systems, it may be impermissible to launch a particular Token Trading System or

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there may not be sufficient demand for the digital securities required for a particular Token Trading System to be commercially viable, and tZERO's business would be materially adversely affected, which could have a material adverse effect on us.

Regulatory authorities may never permit a Token Trading System to become operational.

Depending on the particular Token Trading System, numerous regulatory authorities, including FINRA and the SEC, may need to permit the Token Trading System to become operational. If FINRA, the SEC or any other regulatory authority objected to the Token Trading System or to aspects of the Token Trading System, such regulatory authorities could prevent the Token Trading System from ever becoming operational. The regulatory landscape that tZERO, its broker-dealer subsidiaries, and its partners need to navigate in order to achieve an operational Token Trading System is complex, and tZERO may never be able to do so successfully for a particular Token Trading System. Any such regulatory issues would have a material adverse impact on tZERO's business.

Token Trading Systems may not be widely adopted and may have limited users.

It is possible that Token Trading Systems will not be used by a large number of issuers, broker-dealers or holders of security tokens or that there will be limited public interest in the continued creation and development of Token Trading Systems. In addition, legal and regulatory developments could render any of the Token Trading Systems obsolete or impermissible. Such a lack of use or interest could negatively impact the continued development of Token Trading Systems and the business and financial position of tZERO and have a material adverse effect on us.

Alternative networks may be established that compete with or are more widely used than the Token Trading Systems.

It is possible that alternative networks could be established that utilize the same or similar protocols as those underlying the Token Trading Systems or that facilitate services that are materially similar to the Token Trading Systems' services. The Token Trading Systems may face competition from any such alternative networks, which could negatively impact the Token Trading Systems and have a material adverse effect on tZERO and on us.

The tZERO Platform and the Token Trading Systems, and any blockchain technology on which they rely, may be the target of cyber-attacks or may contain exploitable flaws in its underlying code, which may result in security breaches and the loss or theft of securities that trade on the Token Trading Systems. If such attacks occur or security is compromised, this could expose us to liability and reputational harm and could seriously curtail the utilization of security tokens and cause a decline in the market price of the affected securities and could result in claims against tZERO or us.

The Token Trading Systems, its structural foundation (including the tZERO Platform), and the software applications and other interfaces or applications upon which they rely (including blockchain technology), are unproven, and there can be no assurances that the Token Trading Systems and the creating, transfer or storage of securities on that system will be uninterrupted or fully secure, which may result in impermissible transfers, a complete loss of investors' securities on that system or an unwillingness of market participants to access, adopt and utilize security tokens or the Token Trading Systems. Further, the tZERO Platform, the Token Trading Systems and any technology, including blockchain technology, on which they rely, may also be the target of cyber-attacks (such as "double-spend" attacks or "51%" attacks) seeking to identify and exploit weaknesses, which may result in the loss or theft of securities, which, in turn, may materially and adversely affect the Token Trading Systems, tZERO, and us.

Some market participants may oppose the development of distributed ledger or blockchain based systems like those central to tZERO's commercial mission, which could adversely affect tZERO.

Many participants in the system currently used for trading public securities in the United States may oppose the development of capital markets systems and processes that utilize distributed ledger and blockchain-based systems. The market participants who may oppose such a system may include entities with significantly greater resources, including financial resources and political influence, than tZERO or we have. The ability of tZERO to operate and achieve its commercial goals could be adversely affected by any actions of any such market participants that result in additional regulatory requirements or other activities that make it more difficult for tZERO to operate could adversely affect tZERO's ability to achieve its commercial goals, which could have a material adverse effect on us.


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Risks Related to Blockchain Technology

The regulatory regime governing blockchain technologies, cryptocurrencies, digital assets, the tZERO Platform and offerings of digital assets is uncertain, and new regulations or policies may materially adversely affect the development and the value of such cryptocurrencies and assets.

Regulation of digital assets, like the tZERO Security Tokens, as well as cryptocurrencies, blockchain technologies, cryptocurrency exchanges, and the Token Trading Systems, is currently undeveloped and likely to rapidly evolve as government agencies take greater interest in them. Regulation also varies significantly among international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the permissibility of tokens generally and the technology behind them or the means of transaction or in transferring them. Failure by tZERO and its Token Trading System partners to comply with any laws, rules and regulations, some of which may not exist yet or are subject to interpretation and may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines.

Cryptocurrency networks, distributed ledger technologies, and coin and token offerings also face an uncertain regulatory landscape in many foreign jurisdictions such as the European Union, China and Russia. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that may conflict with those of the United States or may directly and negatively impact tZERO's business. The effect of any future regulatory change is impossible to predict, but such change could be substantial and materially adverse to tZERO's business.

The further development and acceptance of blockchain networks, which are part of a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain networks and blockchain assets would have a material adverse effect on tZERO's business plans and could have a material adverse effect on us.

The growth of the blockchain industry in general, as well as the blockchain networks on which the tZERO Security Tokens will rely, is subject to a high degree of uncertainty. The factors affecting the further development of the cryptocurrency and digital security industry, as well as blockchain networks, include, without limitation:

worldwide growth in the adoption and use of cryptocurrencies, digital securities, and other blockchain technologies;
government and quasi-government regulation of cryptocurrencies, digital securities, and other blockchain assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;
the maintenance and development of the open-source software protocol of cryptocurrency or digital securities networks;
changes in consumer demographics and public tastes and preferences;
the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using government-backed currencies or existing networks;
general economic conditions and the regulatory environment relating to cryptocurrencies and digital securities; and
a decline in the popularity or acceptance of cryptocurrencies or other blockchain‑based tokens.

The cryptocurrency and digital securities industries as a whole have been characterized by rapid changes and innovations and are constantly evolving. Although it has experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks and blockchain assets may materially adversely affect tZERO's business plans.

The prices of digital assets are extremely volatile. Fluctuations in the price of digital assets could materially and adversely affect tZERO's business.

The prices of cryptocurrencies, such as Bitcoin and Ether, and other digital assets have historically been subject to dramatic fluctuations and are highly volatile. A decrease in the price of a single digital asset may cause volatility in the entire digital asset and security token industry. For example, a security breach that affects purchaser or user confidence in Bitcoin or Ether may affect the industry as a whole. This volatility may adversely affect interest in and demand for the Token Trading System, which would materially adversely affect tZERO's business.


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tZERO's and its subsidiaries' businesses are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, technology, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to their business practices, increased cost of operations or otherwise harm their businesses.

tZERO and its subsidiaries are subject to a variety of laws and regulations in the United States and abroad that involve matters central to its business, including user privacy, blockchain technology, data protection and intellectual property, among others. Foreign data protection, privacy, and other laws and regulations are often more restrictive than those in the United States. These U.S. federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which tZERO and its subsidiaries operate.

tZERO and its subsidiaries have adopted appropriate policies and procedures designed to comply with these laws. The growth of their respective businesses and expansion outside of the United States may increase the potential of violating these laws or its internal policies and procedures. The risk of being found in violation of these or other laws and regulations is further increased by the fact that many of these have not been fully interpreted by the regulatory authorities or the courts and are open to a variety of interpretations. Any action brought against tZERO or its subsidiaries for violation of these or other laws or regulations, even if tZERO or its subsidiaries successfully defend against it, could cause tZERO or any of its subsidiaries to incur significant legal expenses and divert its management's attention from the operation of its business. If its operations are found to be in violation of any of these laws and regulations, it may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, it could be required to refund payments received by it, and it could be required to curtail or cease its operations. Any of the foregoing consequences could seriously harm tZERO's or any of its subsidiaries' business and its financial results. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase tZERO's or any of its subsidiaries' operating costs, require significant management time and attention, and subject any of them to claims or other remedies, including fines or demands that they modify or cease existing business practices.

The popularity of cryptocurrencies and digital securities offerings may decrease in the future, which could have a material adverse effect on the cryptocurrency and digital securities industry and tZERO's operations and financial condition.

tZERO was founded to develop and commercialize financial technology based on the use of digital assets, digital securities and blockchain technology. In recent years, cryptocurrencies and digital securities have become more widely accepted among investors and financial institutions but have been also faced increasingly complex legal and regulatory challenges and, to date, have not benefited from widespread adoption by governments, central banks or established financial institutions. However, any significant decrease in the acceptance or popularity of cryptocurrency or digital security offerings may have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.

To date, tZERO's primary source of revenues has been revenues from its wholly owned subsidiaries, SpeedRoute and PRO Securities, and a large percentage of these firms' revenues come from a small number of major customers, making tZERO vulnerable to changes in the business and financial condition of, or demand for SpeedRoute's and PRO Securities' services by, such customers.

To date, tZERO's primary source of revenues has been revenues from its wholly owned subsidiaries, SpeedRoute and PRO Securities. These firms' revenues primarily have come from three major customers, making tZERO vulnerable to changes in the business and financial condition of, or demand for services by, such customers of SpeedRoute and PRO Securities. During the year ended December 31, 2018, revenue passed through to tZERO from the broker-dealers attributable to these three customers accounted for, respectively, 23%, 15% and 11% of tZERO's revenues. tZERO's income and ability to meet its financial obligations could also be adversely affected in the event of bankruptcy, insolvency or significant downturn in the business of one of these SpeedRoute or PRO Securities customers.

The tZERO Platform and any current or future Token Trading Systems have been and will be, as applicable, developed by key technology employees of tZERO and its affiliates, and their operation and further development depend on the continued availability of those key employees.

The tZERO Platform, and any current or future Token Trading System, including technology and intellectual property involved in their creation and operation, have been or will be, as applicable, developed primarily by a small number of key technology employees of tZERO and its affiliates. The loss of the services of any of those key employees could have a material adverse effect on the ability of tZERO to develop, operate or maintain the tZERO Platform or the Token Trading Systems. If

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tZERO were to lose the services of any such key employees, it could be difficult or impossible to replace them, and the loss of any of them could have a material adverse effect on tZERO's operations and financial condition.

The occurrence of any of the foregoing could result in claims against tZERO and us and could have a material adverse effect on us and the holders of our securities.

The development and operation of tZERO's business, including the tZERO Platform and any Token Trading System requires, will likely require, technology and intellectual property rights.

The ability of tZERO to develop tZERO Platform and any Token Trading System that may be developed in the future may depend on technology and intellectual property rights that tZERO may license from unaffiliated third parties. If for any reason tZERO were to fail to comply with its obligations under an applicable license agreement, or were unable to provide or were to fail to provide the technology and intellectual property that the tZERO Platform or any Token Trading System requires, they would be unable to operate, which would have a material adverse effect on tZERO's operations and financial condition and could have a material adverse effect on us.

tZERO may face substantial competition from a number of known and unknown competitors as well as the risk that one or more of them may obtain patents covering technology critical to the operation of the tZERO Platform or any Token Trading System.

We believe that a number of organizations are or may be working to develop trading systems utilizing distributed ledger or blockchain technologies or other novel technologies that may be competitive with tZERO's own technology, including its patented technology. Although it is difficult to obtain reliable information about blockchain activities by companies that may be our competitors, they may include companies such as SharesPost, OpenFinance Network, Templum Inc., Coinbase, KoreConX, Blocktrade AG, Smart Valor, the Nasdaq Stock Market, Intercontinental Exchange, Circle, Ideanomics, CrowdEngine, Securitize, Harbor, and Polymath. As our industry matures, we expect that larger existing companies in the financial services and technology industry, including companies offering services and products related to e-commerce, cloud computing, artificial intelligence, online advertising, search engines, software, and hardware may enter the digital securities secondary trading and digital securities exchange areas of our current business and other areas of our potential business related to distributed ledger or blockchain technologies and compete. Any or all of them may compete with us now or in the near future not only for potential business, but for the time and attention of regulators and for the services of persons with the expertise we need. Some or all of such organizations may have substantially greater technological expertise, experience with distributed ledger technologies and/or financial resources than tZERO or Overstock has, and many of them appear to be attempting to patent technologies that may be competitive with or similar to the technology tZERO has developed and patented. tZERO does not have access to detailed information about the technologies these organizations and/or their respective purchasers may be attempting to patent. If one or more other persons, companies or organizations obtains a valid patent covering technology critical to the tZERO Platform or any Token Trading System, the tZERO partners that need the relevant technology in order to enable the tZERO Platform or any Token Trading System to operate as intended might be unable or unwilling to license the technology, and it could become impossible for the tZERO Platform or any Token Trading System to operate, which could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.  Further, tZERO’s subsidiaries may also face competition in the areas of their respective businesses including accredited investor verification services, money services, or broker dealer services, and these competitors may include Early IQ, InvestReady.com, CharlesSchwab, the New York Stock Exchange, the Nasdaq Stock Market, CBOE, Clearpool Group, Dash Financial Technologies, Coinbase, SpectroCoin, Robinhood, Cash App, Abra, and Kraken. Any or all of them may compete with tZERO’s subsidiaries now for current business or in the near future for potential business.

Additional Risks Relating to Our Retail Business

Our business depends on the Internet, our infrastructure and transaction-processing systems.

We are completely dependent on our infrastructure and on the availability, reliability and security of the Internet and related systems. Substantially all of our computer and communications hardware is located at a single Overstock owned and operated facility. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyber-attacks, acts of war, break-ins, earthquake and similar events. Our back-up facility is not adequate to support sales at a high level. Our servers and applications are vulnerable to malware, physical or electronic break-ins and other disruptions, the occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability to accept and fulfill customer orders. Any system interruption that results in the unavailability of our Website or our mobile app or reduced performance of our transaction systems could interrupt or substantially reduce our ability to conduct our business. We have experienced periodic systems interruptions due to server failure, application failure, power

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failure and intentional cyber-attacks in the past, and may experience additional interruptions or failures in the future. Any failure or impairment of our infrastructure or of the availability of the Internet or related systems could have a material adverse effect on our financial results, business and prospects.

We rely upon paid and unpaid natural search engines to rank our product offerings, and our financial results may suffer if we are unable to regain our prior rankings in natural searches.

We rely on paid and unpaid natural search engines to attract consumer interest in our product offerings, including Google, Bing, and Yahoo!. Changes to their ranking algorithms may further adversely affect our product offerings in paid and/or unpaid searches, and we may at times be subject to ranking penalties if the operators of search engines believe we are not in compliance with their guidelines. Search engine companies change their natural search engine algorithms periodically, and our ranking in natural searches may be adversely affected by those changes, as has occurred from time to time, and which have led us to pursue revenue growth in other more expensive marketing channels. Google's search engine is dominant in our business and has historically been a significant source of traffic to our website, much of it at essentially no incremental cost to us. If the changes we believe Google made in 2017 prevent us from regaining our prior rankings in Google's natural search engine, we will have to utilize more expensive marketing channels or otherwise compensate for the loss of some of the natural search traffic, and if we are unable to do so, our financial results may suffer and the changes may have a material adverse effect on our business. Search engine companies may also determine that we are not in compliance with their guidelines from time to time, as has occurred in the past, and they may penalize us in their search algorithms as a result.

Our business depends on effective marketing, including marketing via email and social networking messaging and our competitors have and may continue to directly increase our marketing costs and also have and may continue to cause us to decrease certain types of marketing.

We depend on effective marketing and high customer traffic. We depend on email to promote our site and offerings and to generate a substantial portion of our revenue. If a significant portion of our target customers no longer utilize email, or if we are unable to effectively and economically deliver email to our potential customers, whether for legal, regulatory or other reasons, it would have a material adverse effect on our business. We also rely on social networking messaging services for marketing purposes, and anything that limits our ability or our customers' ability or desire to utilize social networking services could have a material adverse effect on our business. In addition to competing with us for customers, suppliers, and employees, our competitors have and may continue to directly increase our operating costs, by driving up the cost of various forms of online advertising. We may elect to decrease our use of sponsored search or other forms of marketing from time to time in order to decrease our costs, which may have a material adverse effect on our financial results and business. We may also elect to spend additional amounts on sponsored search or other forms of marketing from time to time in order to increase traffic to our Website, or to take other actions to increase traffic and/or conversion. If we are unable to develop, improve, implement and maintain effective and efficient cost-effective advertising and marketing programs, it would have a material adverse effect on our financial results and business.

Some shoppers may not utilize the search engines at all, and we may be unable to reach some of those shoppers.

Large marketplace websites and sites which aggregate marketplace sellers with a large product selection are becoming increasingly popular, and we may not be able to place our products on these sites to take advantage of their internal search platforms. Further, some shoppers may begin their searches at a competitor's website and may not utilize traditional search engines at all. Our inability to place products on or access these sites may have a material adverse effect on our business.

We are subject to cyber security risks and risks of data loss or other security breaches.

Our business involves the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, and to resulting claims, fines, and litigation. We have been subjected to a variety of cyber-attacks, which have increased in number and variety over time. We believe our systems are probed by potential hackers virtually 24/7, and we expect the problem will continue to grow worse over time. Cyber-attacks may target us, our customers, our suppliers, banks, credit card processors, delivery services, e-commerce in general or the communication infrastructure on which we depend. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, any of which could have a material adverse effect on our financial results and business. Moreover, any insurance coverage we may carry may be inadequate to cover the expenses and other potential financial exposure we could face as a result of a cyber-attack or data breach.

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We face intense competition and may not be able to compete successfully against existing or future competitors.

The online retail market is evolving rapidly and intensely competitive. Barriers to entry are minimal, and current and new competitors can launch new websites at a relatively low cost. We currently compete with numerous competitors, including:

online retailers with or without discount departments, including Amazon.com, AliExpress (part of the Alibaba Group), eBay, and Rakuten.com (formerly Buy.com);
online shopping services, including Google Express;
online specialty retailers such as Blue Nile, Bluefly, Houzz, Jet.com, Wayfair, Zappos.com, and Zulily;
furniture specialists including Ashley Furniture, Bob's Discount Furniture, Havertys, Raymour & Flanigan and Rooms To Go;
traditional general merchandise and specialty retailers and liquidators including Barnes and Noble, Bed, Bath & Beyond, Best Buy, Costco, Crate and Barrel, Ethan Allen, Gilt, Home Depot, HomeGoods, Hudson's Bay Company, IKEA, J.C. Penney Company, Kirkland's, Kohl's, Lands' End, Lowe's, Macy's, Nordstrom, Pier 1 Imports, Pottery Barn, Restoration Hardware, Ross Stores, Saks Fifth Avenue, Sears, T.J. Maxx, Target, Wal-Mart, and Williams-Sonoma, all of which also have an online presence; and
online liquidators such as SmartBargains.

We expect that existing and future traditional manufacturers and retailers will continue to add or improve their e-commerce offerings, and that our existing and future e-commerce competitors, including Amazon, will continue to increase their offerings, their delivery capabilities, and the ways in which they enable shoppers to purchase goods, including their mobile technology and the voice-activated shopping services offered by Amazon. Many of our competitors specialize in one or more of the areas in which we offer products. For example, our furniture offerings compete with more than 100 online retail furniture websites, in addition to many more traditional furniture retail specialists. Some of our competitors run at net losses to gain market share in the online retail market. We also face competition from shopping services such as Google Express, which offers products from Walmart, Costco, Target and other retailers on a voice-activated shopping platform. Competition from Amazon and from other competitors, many of whom have longer operating histories, larger customer bases, greater brand recognition, greater access to capital and significantly greater financial, marketing and other resources than we do, affect us and have had and could continue to have a material adverse effect on our financial results, business and prospects.

Tariffs or other measures that increase the effective price of products we or our suppliers or fulfillment partners import into the United States could have a material adverse effect on our business.

We and many of our suppliers and fulfillment partners source a large percentage of the products we offer on our Website from China and other countries. If the United States imposes tariffs or other measures that directly or indirectly increase the price of products we or they import and that we offer on our Website, the increased prices could have a material adverse effect on our financial results, business and prospects.

Economic factors, including our increasing exposure to the U.S. housing industry, may adversely affect us.

Economic conditions, particularly any weakness in the United States housing market, may adversely affect our financial performance. Over the last several years, the percentage of our sales from home and garden products has increased substantially. We believe that our sales of home and garden products are affected by the strength of the U.S. housing industry, and that downturns in the U.S. housing industry could have a material adverse effect on our financial results, business and prospects.

Decreases in discretionary consumer spending may adversely affect us.

A substantial portion of the products and services we offer are products or services that consumers may view as discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, including discretionary spending. Difficult macro-economic conditions, particularly high levels of unemployment or underemployment, also impact our customers' ability to obtain consumer credit. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costs could reduce consumer spending or change consumer purchasing habits. Slowdowns in the U.S. or global economy, or an uncertain economic outlook, could materially adversely affect consumer spending habits and could have a material adverse effect on our financial results, business and prospects.


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Our international business efforts could adversely affect us.

We sell products in international markets. International sales and transactions are subject to inherent risks and challenges that could adversely affect us, including:

the need to develop new supplier and manufacturer relationships;
the need to comply with additional U.S. and foreign laws and regulations;
changes in international laws, regulatory requirements, taxes and tariffs;
our limited experience with different local cultures and standards;
geopolitical events, such as war and terrorist attacks;
the risk that the products we offer may not appeal to customers in international markets; and
the additional resources and management attention required for such expansion.

Our international business could expose us to penalties for non-compliance with laws applicable to international business and trade, including the U.S. Foreign Corrupt Practices Act, which could have a material adverse effect on our business. Foreign data protection, privacy and other laws and regulations are different and often more restrictive than those in the United States. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices, which may adversely affect our business. To the extent that we make purchases or sales denominated in foreign currencies, we would have foreign currency risks, which could have a material adverse effect on our financial results, business and prospects.

If we do not successfully optimize and operate our warehouse, distribution centers and customer service operations, our business could be harmed.

We have expanded, contracted and otherwise modified our warehouse, distribution centers and customer service operations from time to time in the past, and expect that we will continue to do so. If we do not successfully optimize and operate our warehouse, distribution centers and customer service operations, it could significantly limit our ability to meet customer demand, customer shipping or return time expectations, or result in excessive costs and expenses for the size of our business. Because it is difficult to predict demand, we may not be able to manage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. We may also fail to staff our fulfillment and customer service centers at optimal levels. Our failure to manage our warehouse operations, distribution centers or our fulfillment and customer service centers optimally could adversely affect our financial results and customer experience and could have a material adverse effect on our financial results, business and prospects.

We depend on a large number of other companies to perform functions critical to our business, and any failure on their part could have a material adverse effect our business.

We depend on a large number of other companies, including a large number of independent fulfillment partners whose products we offer for sale on our Website, to perform functions critical to our ability to deliver products and services to our customers. We depend on our fulfillment partners to perform a number of traditional retail operations such as maintaining inventory, preparing merchandise for shipment to our customers and delivering purchased merchandise on a timely basis. We also depend on the delivery services that we and they utilize, on the payment processors that facilitate our customers' payments for their purchases, and on other third parties over which we have no control, for the operation of our business. Difficulties with any of our significant fulfillment partners, delivery services, payment processors or other third parties involved in our business, regardless of the reason, could have a material adverse effect on our financial results, business and prospects.

We depend on our suppliers and fulfillment partners representations regarding product safety, content and quality, and for proper labelling of products.

We rely on our suppliers' and fulfillment partners' representations of product safety, content and quality. We also rely on our suppliers and partners to ensure proper labelling of products. Issues or concerns regarding product safety, labelling, content or quality could result in consumer or governmental claims and could adversely affect our financial results and business. Any indemnity agreement we may have with a supplier or partner of a product may be inadequate or inapplicable, and any insurance coverage we may carry may be inadequate. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business. The occurrence of any of the foregoing could have a material adverse effect on our financial results, business and prospects.


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Our decision to accept and hold cryptocurrency, such as bitcoin, may subject us to exchange risk and additional tax and regulatory requirements.

In 2014, we began accepting bitcoin as a form of payment for purchases on our website. Neither bitcoin nor any of the other cryptocurrencies we may hold are considered legal tender or backed by any government, and bitcoin and other cryptocurrencies we may hold have experienced price volatility, technological glitches and various law enforcement and regulatory interventions. The use of cryptocurrency such as bitcoin has been prohibited or effectively prohibited in some countries. If we fail to comply with regulations or prohibitions applicable to us, we could face regulatory or other enforcement actions and potential fines and other consequences. Our Board of Directors has authorized us to retain, in bitcoin, up to 50% of our sales revenues paid for by customers in bitcoin. From time to time we hold bitcoin and other cryptocurrencies directly, and we have exchange rate risk on the amounts we hold as well as the risks that regulatory or other developments may adversely affect the value of the cryptocurrencies we hold. We may choose not to hedge or may be unable to fully hedge our exposure to cryptocurrencies and may at times be unable to convert cryptocurrencies to U.S. dollars. If any regulatory authority asserts that we require a license or other regulatory approval to conduct business or own an interest in other businesses involving cryptocurrencies, it could have a material adverse effect on our financial results and business.

In addition to our efforts to transition from our historical business as an e-commerce retailer to a blockchain-focused company, we have an evolving e-commerce business model, which increases the complexity of our retail business.

In addition to our efforts to transition from our historical business as an e-commerce retailer to a blockchain-focused company as described in this report, our retail business model has evolved in the past and continues to do so. In prior years we added additional types of services and product offerings and in some cases, we modified or discontinued those offerings, and in some cases have re-launched offerings we had previously terminated. We may continue to try to offer additional types of products or services, and we do not know whether any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mix and the mix of direct/partner sourcing of the products we offer. The additions and modifications to our business have increased the complexity of our business and impacted our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. Future additions to or modifications of our business are likely to have similar effects. Further, any new business or website we launch that is not favorably received by consumers could damage our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our financial results, business and prospects.

Our plans to end our Club O Rewards Mastercard could adversely affect us.
 
We are planning to end our Overstock Club O Rewards Mastercard which offers cardholders a complimentary Club O Rewards membership with a higher reward earning percentage (8%). We anticipate larger than normal rewards redemption from these members during the immediate 60-day grace period following the closure on March 29, 2019 which could have a material adverse effect on our financial results in Q2 2019.

Our insurance coverage and indemnity rights may not adequately protect us against loss.

The types, coverage, or the amounts of any insurance coverage we may carry from time to time may not be adequate to compensate us for any losses we may actually incur in the operation of our business. Further, any insurance we may desire to purchase may not be available to us on terms we find acceptable or at all. We are not indemnified by all of our suppliers, and any indemnification rights we may have may not be enforceable or adequate to cover actual losses we may incur as a result of our sales of their products. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage or the capacity of our indemnitors or our ability to enforce our indemnity agreements, could have a material adverse effect on our financial results, business and prospects.

We are partially self-insured with respect to our employees' health insurance. If the actual costs of these claims exceed the amounts we have reserved for them, we would incur additional expense.

Beginning January 1, 2017, we are partially self-insured with respect to our employees' health insurance, except to the extent of stop-loss coverage that limits our losses both on a per employee basis and an aggregate basis. The actual costs of our employees' health insurance claims could exceed our estimates of those costs for a number of reasons, including more claims or larger claims than we expect, and increases in the costs of healthcare generally. If the actual cost of our employees' health insurance claims and related expenses exceeds the amounts we have accrued, we may be required to record additional charges for these claims and/or to establish additional reserves, which could have a material adverse effect on our financial results, business and prospects.

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Additional Risks Relating to Our Medici Business

The businesses that we are pursuing through our Medici initiatives are novel and subject to technical, operational, financial, regulatory, legal, reputational and marketing risks.

In August 2015, we acquired the assets and business of a financial technology ("fintech") company and in January 2016, we acquired two registered broker-dealers (our "broker-dealer subsidiaries") that were affiliated with the fintech company. We have limited experience with the operation of fintech companies or of broker-dealers. In December 2016, we issued publicly-traded securities traded exclusively on a registered alternative trading system operated by one of our majority-owned broker-dealer subsidiaries, the ownership of which is tracked on a blockchain. Our majority-owned subsidiary tZERO is working on other potential financial applications of blockchain technology, including the potential development of a trading platform for digital "tokens" or "coins" treated as securities. See "Additional Risks Relating to Our tZERO Initiatives" below. These are areas in which we do not have substantial experience, and which are subject to the risks of new and novel businesses, including technical, operational, financial, regulatory, legal and reputational risks, as well as the risk that we may be unable to market, license or sell our technology successfully or profitably. The occurrence of any such risks could have a material adverse effect on our financial results and business.

We may be required to write off amounts relating to our interests in startup businesses.

At December 31, 2018, Overstock and its subsidiaries held minority interests totaling approximately $60.4 million in several companies that are in the startup or development stages and we may acquire additional minority interests in other entities in the future. These interests are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. Additionally, since these interests are in companies that are in the early startup or development stages, even if their technology or products are viable, they may not be able to obtain the capital or resources necessary to successfully bring their technology or products to market. Furthermore, we have no assurance that the technology or products of companies we have funded would be successful, even if they were brought to market. We have written off amounts related to these interests in the past and may in the future write off additional amounts related to these interests. Any such write-offs could be material and could have a material adverse effect on our financial results and business.

Our ownership interest in digital currency transfer and payment businesses may expose us to additional risks.

Medici has acquired equity interests in startup companies which are pursuing a variety of digital currency transfer and payment businesses. Virtually every state in the U.S. regulates money transmitters and money services businesses. In some states the licensing requirements and regulations expressly cover companies engaged in digital currency activities; in other states it is not clear whether or how the existing laws and regulations apply to digital currency activities. Further, U.S. federal law requires registration of most such businesses with FinCEN. These licenses and registrations subject companies to various anti-money laundering, know-your-customer, record-keeping, reporting and capital and bonding requirements, limitations on the investment of customer funds, and inspection by state and federal regulatory agencies. Under U.S. federal law, it is a crime for a person, entity or business that is required to be registered with FinCEN or licensed in any state to fail to do so. Further, under U.S. federal law, anyone who owns all or part of an unlicensed money transmitting business may be subject to civil and criminal penalties. If Bitt, Spera, or FinClusive take any action that could subject them to registration with FinCEN or to licensing requirements in any state before they become properly licensed and registered, we could be subject to potential civil and criminal penalties. Any such penalties, or even the allegation of criminal or other illegal activities, could have a material adverse effect on us and on our financial results and business.

If we do not keep pace with technological changes, it may impair our ability to market, license or sell the products and services developed as part of our Medici initiatives.

The market for products and services based on blockchain technology is characterized by rapid technological change, frequent product and service innovation and evolving industry standards. The success of our Medici initiatives depends on several factors, including the timely completion, introduction and market acceptance of such products and services. Failure in this regard may significantly impair our competitiveness and financial results. In addition, we may need to continuously modify and enhance our offerings to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements or in bringing them to market in a timely fashion. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of products and services to keep pace with technological changes or operate effectively with future network

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platforms and technologies could reduce the demand for our products and services. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.

The blockchain related products and services that we are developing as part of our Medici initiatives have the potential to be used in ways we do not intend, including for criminal or other illegal activities.

Blockchain related products and services, in particular cryptocurrencies, have the potential to be used for financial crimes or other illegal activities. Because the Medici initiatives are novel there are uncertainties regarding any legal and regulatory requirements for preventing blockchain related products and services from being put to such uses, and there are uncertainties regarding the liabilities and risks to the Company if we are unable to prevent such uses. Even if we comply with all laws and regulations regarding financial and blockchain related products and services, we have no ability to ensure that our customers, partners or others to whom we license or sell our products and services comply with all laws and regulations applicable to them and their transactions. Any negative publicity we receive regarding any allegations of unlawful uses of our Medici initiatives could damage our reputation. More generally, any negative publicity regarding unlawful uses of blockchain technology in the marketplace could reduce the demand for our products and services. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.

Risks Relating to Our Common Stock and Other Securities

If we determine not to sell our retail business or make other fundamental changes to our business, the trading prices of our securities may decrease significantly. The trading prices of our securities may also decrease significantly if we determine to take any such actions.

The trading prices of our common stock and other securities have been and may continue to be volatile. Our stock price fluctuations may be due in part to our disclosures about our exploration of strategic alternatives. Our stock price may be adversely affected by our future actions, including any decisions we may make or announcements to pursue or not to pursue such strategic alternatives, and by any announcements we may make regarding any such matters, any of which could cause the trading prices of our securities to decrease significantly which in turn could adversely affect our ability to raise capital and could have a material adverse effect on our financial results, business and prospects.

The trading prices of our securities may be adversely affected by short-selling activities involving our common stock.

The trading prices of our common stock and other securities have been and may continue to be volatile. Our stock price fluctuations may be due in part to short-selling activity related to our common stock. The practice of short-selling activity may adversely affect our common stock price, which in turn could adversely affect our ability to raise capital and could have a material adverse effect on our financial results, business and prospects.

The trading prices of our securities may be affected by the prices of cryptocurrencies, particularly Bitcoin, despite our disclosures that we generally hold very little Bitcoin, and by perceptions regarding the business prospects of blockchain technology generally.

The trading prices of our securities may be affected by the prices of cryptocurrencies, particularly Bitcoin, which may be the result of an apparent misperception that the value of our business is related to the value of Bitcoin, despite our disclosures that we generally hold very little Bitcoin. The market price of our securities may also be affected by perceptions regarding the business prospects of our Medici business and blockchain technology generally. To the extent that our blockchain initiatives do not succeed in a timely manner or at all, or the development or acceptance of blockchain networks, blockchain assets or blockchain applications slows or stops, the trading prices of our securities could decrease significantly, which in turn could adversely affect our ability to raise capital and could have a material adverse effect on our financial results, business and prospects.

We do not intend to pay dividends on our common stock and you may lose the entire amount of your investment in our common stock.

We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, holders of our common stock will not receive any funds without selling their shares. You may not receive a positive return on your investment, and you may lose your entire investment.


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Sales by our significant stockholders could have an adverse effect on the market price of our common and preferred stock.

A small number of our stockholders own a significant percentage of our common stock. Our Chief Executive Officer Patrick Byrne is the beneficial owner of approximately 18% of our common stock and approximately 50% of our Series A preferred stock. Various trusts related to his mother Dorothy Byrne are the beneficial owners of an additional aggregate of approximately 5.0% of our common stock. In addition, according to public filings with the SEC, at December 31, 2018, a small number of institutional investors were beneficial owners of significant percentages of our common stock. Sales by any of such stockholders could have a material adverse effect on the market prices of our common stock and/or preferred stock. Dr. Byrne and/or entities he controls, including High Plains Investments LLC, may sell shares of our common stock in the future and/or may enter into a Rule 10b5-1 plan for the sale of shares of our common stock in the future. In addition, the transfer of ownership of a significant portion of our outstanding shares within a three-year period could adversely affect our ability to use our net operating losses to offset future taxable net income. Any of the foregoing could have a material adverse effect on the holders of our securities.

Pledges of our shares by officers and directors and significant stockholders could have an adverse effect on us and on the market price of our common and preferred stock.

We do not prohibit or restrict our officers, directors, significant stockholders or others from pledging shares of our company owned by any of them, by holding them in a margin account or otherwise. Patrick Byrne, who is our Chief Executive Officer, a member of our Board and our largest stockholder (directly and indirectly through High Plains Investments LLC), has pledged approximately 1.9 million of the approximately 5.8 million shares he beneficially owns to one or more banks to secure a credit facility for High Plains Investments LLC and a personal loan. Any margin call or similar action by a lender that results in a forced sale of shares pledged by any of our officers, directors or significant stockholders could have an adverse effect on us and could have an adverse effect on the market price of our securities.

Our quarterly operating results are volatile and may adversely affect the market prices of our common stock and preferred stock, and you may lose all or a part of your investment.

We have experienced and expect to continue to experience significant fluctuations in our operating results in part because of seasonal fluctuations in traditional retail patterns. Our gross revenues have historically been significantly lower in the first and second calendar quarters than in the fourth quarter of the prior year due primarily to increased shopping activity during the fourth quarter holiday season. Further, we generally increase our inventories substantially in anticipation of holiday season shopping activity, which has a negative effect on our cash flow. As a result of the fourth quarter holiday season shopping, we also typically have unusually large payments due to our fulfillment partners in the first calendar quarter. Our revenues and operating results have varied in the past and may continue to vary significantly from quarter to quarter due to a number of other factors, many of which are outside our control. In addition to seasonal effects and the other risk factors described in this report, factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affect the market prices of our common stock and preferred stock include:

increases in the cost of advertising and changes in our sales and marketing expenditures;
expenses we incur in our Medici and tZERO business development efforts;
our inability to retain existing customers or encourage repeat purchases;
the extent to which our existing and future marketing campaigns are successful;
price competition, particularly in the costs of marketing as well as in product pricing;
the amount and timing of operating costs and capital expenditures;
the amount and timing of our purchases of inventory;
our inability to manage distribution operations or provide adequate levels of customer service;
increases in the cost of fuel, transportation or distribution;
our inability to implement technology changes or integrate operations and technologies from acquisitions or other business combinations;
our efforts to offer new lines of products and services; and
our inability to attract users to our website.

Any of the foregoing could have a material adverse effect on our financial results and business and our ability to raise capital and could have a material adverse effect on the holders of our common stock and of our preferred stock.


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Our outstanding preferred stock could adversely affect the holders of our common stock in some circumstances.

We have two series of preferred stock outstanding. The preferred stock could adversely affect the holders of our common stock in some circumstances. The preferred stock generally votes with the common stock, with holders of the preferred stock having one vote for each share held. As of December 31, 2018, the 481,259 outstanding shares of preferred stock constituted approximately 1.5% of the total number of shares of the preferred stock and the common stock, taken together. The preferred stock ranks senior to the common stock with respect to dividends, is entitled to an annual cash dividend of $0.16 per share in preference to any dividend on the common stock and is generally entitled to participate in any dividends we pay on the common stock. The preferred stock ranks equally with the common stock upon our liquidation, winding up or dissolution. Generally, in a business combination, each share of the preferred stock would be treated as a share of common stock. Any of the foregoing could have a material adverse effect on the holders of the common stock.

We may issue additional preferred stock without further stockholder approval, for purposes of a stockholder rights plan or for other purposes, and any such preferred stock could entitle the holders to rights superior to those of the holders of our common stock.

Our amended and restated certificate of incorporation authorizes our board to designate and issue preferred stock on such terms as may be approved by the board without further stockholder approval. Our board could do so in connection with the adoption of a stockholder rights plan or for other reasons. Preferred stock could be issued with rights, preferences and privileges superior to those of our common stock. In addition, the issuance of preferred stock could have the effect of making an acquisition of our Company more difficult or costly. We currently have 1.0 million authorized shares of preferred stock undesignated as to series, and we could cause shares currently designated as to series but not outstanding to become undesignated and available for issuance as a series of preferred stock to be designated in the future.

Our Board of Directors or the compensation committee could accelerate the vesting of outstanding restricted stock units upon a sale of the Company or otherwise, which could result in an increase in the number of shares outstanding.

The compensation committee of our board has granted and expects to grant additional restricted stock units ("RSUs") to certain of our employees and directors. Upon vesting, we issue one share of common stock for every RSU held. The board or the compensation committee could determine to accelerate the vesting of RSUs in the event of our sale of our retail business or otherwise, which would result in an increase in the number of shares outstanding and would dilute stockholders' ownership of our company. Although the number of RSUs outstanding changes frequently, if all RSUs outstanding were vested as of December 31, 2018, the RSUs would convert into approximately 559,000 shares of our common stock, or approximately 2.0% of the number of shares of common stock currently outstanding.

We generally have not received significant coverage by securities analysts, and the lack of coverage may adversely affect our share price and trading volume.

We generally have not received significant coverage by securities analysts, and the securities analysts who do cover us may stop coverage at any time. The lack of coverage may adversely affect our share price and trading volume and may cause our share price or trading volume to be lower than they might be if more analysts covered us.

Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our Board of Directors. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions:

authorizing "blank check" preferred stock, which could be issued by our Board of Directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;
limiting the liability of, and providing indemnification to, our directors and officers;
limiting the ability of our stockholders to call and bring business before special meetings;
providing that our Board of Directors is classified into three classes of directors with staggered three-year terms;
only permitting the Board of Directors to fix the number of directors and to fill vacancies;
prohibiting cumulative voting in the election of directors;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

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requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors;
controlling the procedures for the conduct and scheduling of Board of Directors and stockholder meetings; and
designating a state court located in the State of Delaware as the sole and exclusive forum for specified matters.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such 15% or greater stockholder.

Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock or other securities and could also affect the price that some investors are willing to pay for our common stock or other securities.

Additional Risks Related Primarily to our Series A Preferred Stock

Our Series A Preferred shares are substantially different from other securities traded in the U.S. public markets and are subject to a variety of unusual restrictions and material risks.

Our Series A Preferred can trade only on the PRO Securities ATS utilizing the tZERO Platform. Trades of the Series A Preferred settle on the trade date. The Series A Preferred is not and will not be listed on any securities exchange or any other market of any kind. The Series A Preferred is extraordinarily illiquid. Only approximately ten trades in the Series A Preferred have taken place since we issued the Series A Preferred in December 2016. Shares of Series A Preferred can be held only in an online brokerage account with Keystone and cannot be held in any other account or manner. Only certain persons and types of entities may purchase Series A Preferred. As a result of these and other matters, the market for the Series A Preferred is likely to remain extraordinarily illiquid and it may be impossible to sell any shares of the Series A Preferred.

The technology on which the tZERO Platform depends has been developed by our majority-owned subsidiary, tZERO, and is licensed by its subsidiary, PRO Securities, and the Series A Preferred depends on both tZERO and on PRO Securities, neither of which has substantial resources.

tZERO is a majority-owned subsidiary of ours and owns 100% of the equity interest in PRO Securities. tZERO licenses the tZERO Platform to PRO Securities, and PRO Securities operates the PRO Securities ATS. Neither tZERO nor PRO Securities has substantial resources or any commitment from any person, including the Company, to contribute additional capital or to make any loan to either of them. If any one or more of the Company, tZERO or PRO Securities were unable to fund its operations in the future, or if any one or more of them were to become the subject of a bankruptcy or other insolvency proceeding, PRO Securities might be unable to continue to operate the tZERO Platform, and the Series A Preferred could be materially adversely affected. In any such event, or if the PRO Securities ATS or the tZERO Platform were to be unable to operate as a result of intellectual property issues or fail to operate as intended for any other reason, holders of our capital stock, including the Series A Preferred, could lose their entire investment in our capital stock, including all amounts invested in the Series A Preferred.

Accounts for the Series A Preferred are held directly in the customer's name, rather than in "street name," and the complete trading history of each digital wallet is available to the general public and it may be possible for members of the public to determine the identity of the holders of wallets.

The Series A Preferred shares are directly recorded on our stockholder books and records maintained by Computershare Trust Company, N.A. ("Computershare"), and cannot be held in "street name". The tZERO Platform makes trade data publicly available shortly after each trade. The publicly available information includes the digital wallet address of each holder of Series A Preferred and the entire trading history of each wallet, including the price of each trade and the balance of the securities held. In addition, because all holders of the Series A Preferred are holders of record, all of them are subject to the risk of loss of their anonymity.


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The Series A Preferred depends on both Keystone and its clearing broker, ETC.

The Series A Preferred depends on both Keystone and Electronic Transaction Clearing, Inc. ("ETC"). Keystone is the only broker dealer authorized to provide the accounts required to trade the Series A Preferred, and ETC is the clearing broker for Keystone with respect to the Series A Preferred. Any failure of either Keystone or ETC to continue operating or to satisfactorily perform its obligations could make it impossible to trade the Series A Preferred.

In the event of the insolvency of Keystone or ETC, the Securities Investor Protection Corporation might not provide any protection to the holders of Series A Preferred.

The Securities Investor Protection Corporation ("SIPC") oversees the liquidation of member broker dealers that close when the broker dealer is bankrupt or in financial trouble, and customer assets are missing. SIPC normally provides limited protection to customers. However, if Keystone or ETC were to become insolvent, the structure of the trading system for the Series A Preferred could mean that SIPC would provide no protection to holders at all, which could have a material adverse effect on holders of Series A Preferred.

Transactions involving the Series A Preferred could result in errors, which may be impossible to correct.

Some transactions in the Series A Preferred could require manual intervention, which could result in errors, and because trades on in the Series A Preferred settle on the trade date, it may be impossible to correct any error, regardless of the source of the error, which could have a material adverse effect on holders of Series A Preferred.

The Series A Preferred depends on Computershare as the transfer agent for the Series A Preferred.

Computershare serves as the transfer agent for the Series A Preferred. If Computershare were unable or unwilling for any reason to serve as such, trading in the Series A Preferred would be impossible unless we were able to substitute another transfer agent, which would have a material adverse effect on the holders of the Series A Preferred.

The potential application of U.S. laws regarding traditional investment securities to the Series A Preferred is unclear.

Because of the differences between the Series A Preferred and traditional investment securities, there is a risk that issues that might easily be resolved by existing law if traditional securities were involved may not be easily resolved for the Series A Preferred. The occurrence of any such issue or dispute could have a material adverse effect on the holders of Series A Preferred.

The potential application of U.S. laws regarding virtual currencies and money transmission to PRO Securities' use of the Ethereum blockchain is unclear.

The tZERO Platform uses the Ethereum blockchain for certain purposes. None of the parties involved in the operation of the tZERO Platform is licensed under the virtual currency or money transmission regulations of any state in the United States or registered with FinCEN. If any regulatory authority were to assert that the operation of the tZERO Platform requires such licensing or registration, it could have a material adverse effect on the holders of the Series A Preferred.

We have the right to convert the outstanding shares of Series A Preferred into shares of Series B Preferred at any time.

We have the right to convert the Series A Preferred into Series B Preferred at any time, and the terms of the Series B Preferred may be amended at any time without the consent of the holders of the Series A Preferred. Any such conversion and any such amendment of the Series B Preferred could have a material adverse effect on holders of Series A Preferred.

The restrictions on the tax reporting of holder's cost basis in shares of Series A Preferred will not allow normal tax planning in the sale of shares of Series A Preferred and may result in disadvantageous tax consequences to a seller of Series A Preferred.

Only one method of cost basis reporting (the first-in, first-out, or FIFO, method) is available for the Series A Preferred. As a result, sellers of Series A Preferred may be required to pay more tax on their sales or to pay taxes earlier than if other normal methods of cost basis reporting had been available, which could have a material adverse effect on the holders of Series A Preferred.


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Additional Risks Related to both our Series A Preferred Stock and our Series B Preferred Stock

We do not intend to issue any additional shares of either Series A Preferred or Series B Preferred, which is expected to continue to result in very limited trading in each series.

We do not intend to issue any additional shares of Series A Preferred or of Series B Preferred, and we expect trading in the Series A Preferred and the Series B Preferred to continue to be very limited.

We do not expect there to be any market makers to develop a trading market in the Series A Preferred, and there is only one market maker in the Series B Preferred.

Most securities that are publicly traded in the United States have one or more broker dealers acting as "market makers" for the security. A market maker is a firm that stands ready to buy and sell the security on a regular and continuous basis at publicly quoted prices. Currently, to our knowledge, there is only one market maker in the Series B Preferred. Further, we do not believe that the Series A Preferred will ever have any market makers. We expect the lack of market makers to continue to contribute to a lack of liquidity in the Series A Preferred and in the Series B Preferred, which could have a material adverse effect on holders' ability to trade either of them.

Rule 144 is not available for resales of "restricted shares" of Series A Preferred, and Rule 144 volume limitations on resales of Series B Preferred are very low.

Persons, including non-affiliates of a public company such as the Company, who acquire shares directly or indirectly from the public company, or from an affiliate of the public company, in a transaction or chain of transactions not involving any public offering, or otherwise as described in Rule 144, acquire "restricted shares" for purposes of Rule 144. Although Rule 144 permits public sales of "restricted shares" subject to certain conditions, Rule 144 is not available for any sales of Series A Preferred, and the sale of any such shares may be difficult or impossible. Further, because of the limited number of shares of Series B Preferred outstanding, the volume limitations of Rule 144 would severely limit sales of Series B Preferred under Rule 144.

We will have an economic incentive to repurchase Series A Preferred and Series B Preferred at prices below the redemption price, and our doing so could cause the trading prices of Series A Preferred and Series B Preferred, as applicable, to decrease further.

We do not intend to repurchase any shares of the Series A Preferred or Series B Preferred, but if we do, we would do so only at or below the prices at which we could redeem the shares. If we repurchase or redeem shares of either Series A Preferred or Series B Preferred, the trading market for the shares would become less liquid, which could cause the trading prices to decrease further, giving us an economic incentive to repurchase additional shares. The occurrence of the foregoing could have a material adverse effect on holders of Series A Preferred, Series B Preferred, or both.

A share of Series A Preferred and/or Series B Preferred may have a substantially lower market value than a share of our common stock.

The trading prices of the Series A Preferred and the Series B Preferred have been and may continue to be substantially lower than the trading price of our common stock, which could have a material adverse effect on holders of Series A Preferred and holders of Series B Preferred.

Holders of Series A Preferred and/or Series B Preferred have no rights with respect to our common stock, but they may be adversely affected by certain events or changes made with respect to our common stock.

Holders of our Series A Preferred and our Series B Preferred have no rights with respect to our common stock, and no right to convert their shares into common stock or to exchange their shares for common stock, except that such holders have the right to vote with the common stock. Holders of Preferred Stock do not have other rights of the holders of the common stock, including the right to respond to common stock tender offers, if any, and their investment in the Series A Preferred and/or the Series B Preferred may be materially negatively affected by any such event. Holders' lack of any such rights, or the occurrence of any such event, could have a material adverse effect on holders of Series A Preferred and holders of Series B Preferred.


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Voting rights of holders of Preferred Stock generally will be limited to voting together with the holders of the common stock as a single class, and the holders of the Series A Preferred and the holders of the Series B Preferred collectively will have only a small percentage of the voting power on any matter submitted to the holders of the common stock and the Series A Preferred and Series B Preferred, voting together as a single class.

Voting rights of holders of Preferred Stock generally will be limited to voting together with the holders of the common stock as a single class. Neither the holders of the Series A Preferred nor the holders of the Series B Preferred have any right by themselves, either together or as separate classes, to elect any members of our Board of Directors. As of December 31, 2018, the 481,259 shares of Preferred Stock that remained outstanding constituted approximately 1.5% of the total number of shares of the Preferred Stock and the common stock, taken together. If an amendment requiring stockholder approval is proposed to our Amended and Restated Certificate of Incorporation or our Amended and Restated Bylaws, the holders of the Series A Preferred and the holders of the Series B Preferred will vote together with the holders of the common stock as a single class, but neither the holders of the Series A Preferred nor the holders of the Series B Preferred will be entitled to a class vote on the amendment, unless the proposed amendment would adversely affect the special rights, preferences, privileges and voting powers of the Series A Preferred or Series B Preferred, respectively. Holders' limited voting rights and any of the foregoing events could have a material adverse effect on holders of Series A Preferred and holders of Series B.

The Series A Preferred and the Series B Preferred rank junior to all of our and our subsidiaries' liabilities, as well as the capital stock of our subsidiaries held by third parties, in the event of a bankruptcy, liquidation or winding up of our or our subsidiaries' business.

In the event of our bankruptcy, liquidation or winding up, any assets will be available to make payments to holders of Series A Preferred and to holders of Series B Preferred only after all of our liabilities have been paid, and neither the Series A Preferred nor the Series B Preferred will have any preference over the common stock in the event of our bankruptcy, liquidation or winding up. In addition, the Series A Preferred and Series B Preferred will rank structurally junior to all existing and future liabilities of our subsidiaries, as well as the capital stock of our subsidiaries held by third parties, including employees holding shares of our majority-owned subsidiary tZERO and employees holding shares of any other direct or indirect subsidiary of ours, whether now existing or created in the future. Any bankruptcy, liquidation or winding up of the Company or any of its wholly or partially owned subsidiaries would have a material adverse effect on holders of Series A Preferred and holders of Series B Preferred.

Our obligation to pay dividends on the Series A Preferred or on the Series B Preferred is limited, and our ability to pay dividends on the Series A Preferred and on the Series B Preferred may be limited.

Our obligation to pay preferential dividends on the Series A Preferred and the Series B Preferred is subject to our Board of Directors declaring such dividend payments, and our failure to pay preferential dividends on the Series A Preferred and on the Series B Preferred might have no legal effect on us at all, although it could adversely affect the trading prices of the Series A Preferred and of the Series B Preferred. Further, our payment of any dividends will be subject to contractual and legal restrictions and other factors the board deems relevant, including agreements governing any future indebtedness of ours. Any of the foregoing could have a material adverse effect on the holders of the Series A Preferred and the holders of the Series B Preferred.

Purchasers of the Series A Preferred and of the Series B Preferred may be adversely affected by our issuance of any subsequent series of preferred stock.

Neither the terms of the Series A Preferred nor the terms of the Series B Preferred restrict our ability to issue one or more additional new series of preferred stock, any or all of which may rank equally with or have preferences over the Series A Preferred and the Series B Preferred as to dividend payments, voting rights, rights upon liquidation or other types of rights. We will have no obligation to consider the specific interests of the holders of Series A Preferred or the specific interests of the holders of Series B Preferred in creating any such new series of preferred stock or engaging in any such offering or transaction. Our creation of any such new series of preferred stock or our engaging in any such offering or transaction could have a material adverse effect on the holders of Series A Preferred and the holders of Series B Preferred.

It is uncertain whether the IRS will treat the Series A Preferred and Series B Preferred as common stock or preferred stock for U.S. federal income tax purposes.

We intend to treat the Series A Preferred and Series B Preferred as common stock for U.S. federal income tax purposes. Nevertheless, it is unclear whether the IRS will treat the Series A Preferred and Series B Preferred as common stock for U.S. federal income tax purposes. If the IRS were not to treat either the Series A Preferred or the Series B Preferred as

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common stock for U.S. federal income tax purposes, it could have a material adverse effect on the holders of Series A Preferred and the holders of Series B Preferred.

ITEM 1B. UNRESOLVED STAFF COMMENTS
      None.

ITEM 2.    PROPERTIES
As of December 31, 2018 , we operated the following facilities in our retail business segments, unless otherwise indicated:
Corporate office space
We own approximately 236,000 square feet of office space in Midvale, Utah, which consists of our corporate headquarters, and which is primarily used for our retail business segment, with a small portion of the space used by our Medici business, including our tZERO segment.
We lease approximately 12,000 square feet of additional office space in the United States for tZERO's main office.
We lease approximately 6,000 square feet of additional office space in Ireland for developers which are primarily used for our retail business segment.
Warehouse, fulfillment and customer service space
We lease approximately 1.5 million square feet in the United States for warehouse, fulfillment, customer service, and other operations.
Data centers
We lease approximately 3,300 square feet in the United States for various data centers.
 
ITEM 3.    LEGAL PROCEEDINGS
The information set forth under Item 15 of Part IV, "Financial Statements—Note 12. Commitments and Contingencies, subheading Legal Proceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K is incorporated by reference in answer to this Item.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market information

The principal U.S. trading market for our common stock is the Nasdaq Global Market. Our common stock is traded under the symbol "OSTK."

Stock Performance Graph

The stock performance graph is included in Part III, Item 12.

Securities Authorized for Issuance under Equity Compensation Plans

Except as set forth herein, the information required by this Item is included in Part III, Item 12, or incorporated therein by reference to our definitive proxy statement for the 2019 annual meeting of stockholders.

Holders
    
As of March 13, 2019 , there were 120 holders of record of our common stock. Many of our shares of common stock are held by brokers and other institutions on behalf of the beneficial owners.

Dividends

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for future growth and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends on our common stock will be at the discretion of our Board of Directors and will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the Board of Directors deems relevant.

At December 31, 2018 we had 481,259 shares of our preferred stock (the "Preferred Stock") outstanding. The Preferred Stock ranks senior to our common stock with respect to dividends. Holders of the Preferred Stock are entitled to an annual cash dividend of $0.16 per share (1.0% of the subscription price), in preference to any dividend payment to the holders of the common stock, out of funds legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the Preferred Stock are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the common stock, subject to potentially different treatment if we effect a stock dividend, stock split or combination of the common stock. There are no arrearages in cumulative preferred dividends. We declared and paid a cash dividend of $0.16 per share on our preferred stock during 2018.

Recent sales of unregistered securities

None.

Issuer purchases of equity securities

None.

Preferred Stock

In December 2016, we issued 695,898 shares of our preferred stock, consisting of 126,565 shares of our Blockchain Voting Series A Preferred Stock (the "Series A Preferred") and 569,333 shares of our Voting Series B Preferred Stock (the "Series B Preferred" and together with the Series A Preferred, the "Preferred Stock"), in a public offering registered under the Securities Act of 1933, as amended. As of December 31, 2018, the 481,259 shares of Preferred Stock that remained outstanding constituted approximately 1.5% of the total number of shares of the Preferred Stock and the common stock, taken together. Neither the Series A Preferred Stock nor the Series B Preferred Stock is registered under the Securities Exchange Act of 1934,

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as amended. The Series A Preferred are digital securities that trade exclusively on a registered alternative trading system ("ATS") operated by tZERO's wholly-owned subsidiary, PRO Securities, LLC (the "PRO Securities ATS"), utilizing software technology known as the tZERO® Issuance and Trading Platform (the "tZERO Platform"). The Series B Preferred are non-digital securities that trade in the over-the-counter market and are quoted on the OTCQX market operated by OTC Markets Group.

Holders of the Preferred Stock do not have any right to convert or exchange such shares for shares of our common stock or any other security, however, at our sole discretion, we may convert the Series A Preferred shares into Series B Preferred shares at any time on a one-to-one basis. Until the third anniversary of the Original Issuance Date, we may redeem, at our discretion, either or both the Series A and Series B Preferred shares for an amount equal to the highest of the following: (1) the subscription price plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a five-trading-day period and (3) 105% of the average trading price of the series of preferred shares during the same five-day-trading period. Except as required by law, the Preferred Stock vote with the common stock on all matters. Holders of the Preferred Stock have one vote for each share held. The Preferred Stock ranks senior to the common stock with respect to dividends. Holders of the Preferred Stock are entitled to an annual cash dividend equal to 1.0% of the subscription price for the Preferred Stock, rounded to the nearest $0.01, in preference to any dividend payment to the holders of the common stock, out of funds legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the Preferred Stock are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the common stock, subject to different treatment if we effect a stock dividend, stock split or combination of the common stock. In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately, with each share of Series A Preferred and each share of Series B Preferred being treated as though it were a share of our common stock. If we are party to any merger or consolidation in which our common stock is changed into or exchanged for stock or other securities of any other person (or the Company) or cash or any other property (or a right to receive the foregoing), we will use all commercially reasonable efforts to cause each outstanding share of the Preferred Stock to be treated as if such share were an additional outstanding share of common stock in connection with any such transaction.

Securities authorized for issuance under equity compensation plans
    
Our Board of Directors adopted the 2005 Equity Incentive Plan, which was most recently amended and restated and re-approved by the stockholders on May 9, 2017 (as so amended and restated, the "Plan"). Under the Plan, the Board of Directors may issue incentive stock options to our employees and directors and non-qualified stock options to consultants, as well as restricted stock units and other types of equity awards of the Company.

Options granted under the Plan generally expire at the end of ten years and vest in accordance with a vesting schedule determined by our Board of Directors, usually over four years from the grant date. We have not granted compensatory stock options since 2008, and no stock options are outstanding under the Plan. At December 31, 2018 , no options were outstanding under the Plan.

Restricted stock units granted in 2018 , 2017 , and 2016 vest over three years at 33.3% at the end of each of the first, second and third year. Each restricted stock unit represents the right to one share of common stock upon vesting. The following is a summary of restricted stock unit activity (amounts in thousands, except per share data):
 
 
2018
 
2017
 
2016
 
 
Units
 
Weighted
Average
Grant Date
Fair Value
 
Units
 
Weighted
Average
Grant Date
Fair Value
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding—beginning of year
 
540

 
$
17.05

 
560

 
$
17.46

 
349

 
$
24.80

Granted at fair value
 
387

 
65.42

 
310

 
17.75

 
541

 
14.52

Vested
 
(234
)
 
17.68

 
(212
)
 
19.58

 
(219
)
 
22.57

Forfeited
 
(134
)
 
42.85

 
(118
)
 
16.21

 
(111
)
 
16.52

Outstanding—end of year
 
559

 
$
44.08

 
540

 
$
17.05

 
560

 
$
17.46

    
At December 31, 2018 , 1.8 million shares of stock remained available for future grants under the Plan.


43


ITEM 6.    SELECTED FINANCIAL DATA
The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of Overstock.com, Inc. and related footnotes included elsewhere in this Annual Report on Form 10-K and the discussion under Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial data has been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The historical financial and operating information may not be indicative of our future performance. The following discussion and analysis also should be read in conjunction with the disclosures in Item 1. "Business" under "Our Retail Business" and "Our Medici Business," as well as the risk factors described in Item 1A. "Risk Factors."

Revenues and cost of goods sold recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of operations. "Other" includes revenues and costs of goods sold related to our Medici business. In addition, we have recast the prior period revenues and cost of goods sold to conform with current year presentation.
 
 
Year ended December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
(in thousands, except per share data)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenue, net
 
 
 
 
 
 
 
 
 
 
Retail
 
$
1,800,187

 
$
1,728,104

 
$
1,784,782

 
$
1,655,908

 
$
1,497,103

Other
 
21,405

 
16,652

 
15,181

 
1,930

 

Total net revenue
 
1,821,592

 
1,744,756

 
1,799,963

 
1,657,838

 
1,497,103

Cost of goods sold
 
 
 
 
 
 
 
 
 
 
Retail
 
1,452,195

 
1,392,558

 
1,458,411

 
1,353,184

 
1,218,044

Other
 
15,489

 
11,647

 
10,203

 

 

Total cost of goods sold
 
1,467,684

 
1,404,205

 
1,468,614

 
1,353,184

 
1,218,044

Gross profit
 
353,908

 
340,551

 
331,349

 
304,654

 
279,059

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 
274,479

 
180,589

 
147,896

 
124,468

 
109,461

Technology
 
132,154

 
115,878

 
106,760

 
98,533

 
86,258

General and administrative
 
164,481

 
90,718

 
89,298

 
82,187

 
71,777

Litigation settlement
 

 

 
(19,520
)
 

 

Restructuring
 

 

 

 

 
(360
)
Total operating expenses
 
571,114

 
387,185

 
324,434

 
305,188

 
267,136

Operating income (loss)
 
(217,206
)
 
(46,634
)
 
6,915

 
(534
)
 
11,923

Interest income
 
2,208

 
659

 
326

 
155

 
152

Interest expense
 
(1,468
)
 
(2,937
)
 
(877
)
 
(140
)
 
(39
)
Other income (expense), net
 
(3,488
)
 
1,178

 
14,181

 
3,634

 
1,169

Income (loss) before income taxes
 
(219,954
)
 
(47,734
)
 
20,545

 
3,115

 
13,205

Provision (benefit) for income taxes
 
(2,384
)
 
64,188

 
9,297

 
1,895

 
4,404

Consolidated net income (loss)
 
$
(217,570
)
 
$
(111,922
)
 
$
11,248

 
$
1,220

 
$
8,801

Less: Net loss attributable to noncontrolling interests
 
(11,500
)
 
(2,044
)
 
(1,274
)
 
(1,226
)
 
(53
)
Net income (loss) attributable to stockholders of Overstock.com, Inc.
 
$
(206,070
)
 
$
(109,878
)
 
$
12,522

 
$
2,446

 
$
8,854

Net income (loss) per common share—basic:
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shares—basic
 
$
(6.83
)
 
$
(4.28
)
 
$
0.49

 
$
0.10

 
$
0.37

Weighted average common shares outstanding—basic
 
29,976

 
25,044

 
25,342

 
24,612

 
23,999

Net income (loss) per common share—diluted:
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shares—diluted
 
$
(6.83
)
 
$
(4.28
)
 
$
0.49

 
$
0.10

 
$
0.36

Weighted average common shares outstanding—diluted
 
29,976

 
25,044

 
25,426

 
24,703

 
24,317

See the footnotes beneath the balance sheet data on the following page.

44



 
 
As of December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
(in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
141,512

 
$
203,215

 
$
183,098

 
$
170,262

 
$
181,641

Restricted cash
 
1,302

 
455

 
430

 
430

 
580

Working capital
 
(26,219
)
 
50,534

 
(4,843
)
 
(10,308
)
 
15,260

Total assets
 
461,219

 
433,815

 
485,076

 
428,389

 
376,865

Total liabilities
 
250,513

 
261,692

 
312,116

 
279,028

 
247,645

Stockholders' equity
 
210,706

 
172,123

 
172,960

 
149,361

 
129,220


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Special Cautionary Note Regarding Forward-Looking Statements." Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K, including those set forth above under "Special Cautionary Note Regarding Forward-Looking Statements" or in Item 1A under the heading "Risk Factors" or elsewhere in this Annual Report on Form 10-K. In addition, our future results may be significantly different from our historical results. The following discussion and analysis also should be read in conjunction with the disclosures in Item 1. "Business" under "Our Retail Business" and "Our Medici Business," as well as the risk factors described in Item 1A. "Risk Factors."

Introduction

We are an online retailer and advancer of blockchain technology. Through our online retail business, we offer a broad range of price-competitive products, including furniture, home decor, bedding and bath, and housewares, among other products. We sell our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites. Our retail business initiatives are described in more detail below under "Our Retail Business."

Our Medici business initiatives seek to develop and advance the concepts of "Government as a Service" and a "Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage the transparency and immutability of blockchain technology to generate efficiencies and increase security and control in six areas of civilizational necessity: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. Our Medici business initiatives include our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), which conducts the majority of its business through its majority-owned subsidiary tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. Medici Ventures currently holds minority equity interests in several technology companies whose focuses include the areas mentioned above. Our Medici business initiatives are described in more detail below under "Our Medici Business" and our tZERO business initiatives are described in more detail below under "Our tZERO Business Initiatives."

We have engaged Guggenheim Securities, LLC to help us identify and evaluate certain strategic initiatives. We are considering a range of potential transactions, including a sale of our retail business and additional equity or debt financings. Our Board of Directors continually discusses a variety of potential strategic and financial options and other changes to our business, but has not approved or made any determination to consummate any strategic transaction, and may choose not to do so in the foreseeable future or at all.


45


Our Retail Business

Our retail business, through December 31, 2018 , generated nearly all of our net revenues. In our retail business, our goal is to provide goods to furnish and accessorize "dream homes" for our target customers—consumers who seek quality, stylish merchandise at bargain prices. At December 31, 2018 , we offered 4.9 million products ( 8.9 million SKUs), of which over 99% were in-line products (products in active production), including more than 25,000 private label products offered under eleven private label brands. We believe that the furniture and home goods market, which is highly fragmented and has traditionally been served by brick and mortar stores, will continue transitioning to online sales, particularly as Millennial consumers (defined as those aged 20-36), who are generally comfortable shopping online, start families and move into new homes. We regularly change our product assortment to meet the evolving preferences of our customers and current trends. Our products include, among others, furniture, home décor including rugs, bedding and bath, home improvement, and kitchen items. We compete primarily based on:

Quality customer experience with an emphasis on price, value, and a wide assortment of products delivered in a personalized format with the convenience of our mobile app, and with the benefits of our award-winning customer care;
Proprietary technologies which we believe help us provide our customers with a quality shopping experience;
Logistics capabilities tailored to the furniture and home goods category and developed over our many years of e-commerce experience;
Long-term mutually beneficial relationships with our partners, which currently number approximately 4,000 ; and
Our Club O Loyalty Program, which we believe increases customer engagement and retention.

For 2018 , nearly all our retail sales through our Website were from transactions in which we fulfilled orders through our network of approximately 4,000 third-party manufacturers, distributors and other suppliers ("partners") selling on our Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. We provide our partners with access to a large customer base and convenient services for order fulfillment, customer service, returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. Our retail sales also includes direct sales of our own inventory shipped from our warehouses, including some customer returns of partner products. Our warehouses primarily fulfill orders from direct sales of our own inventory. Our warehouses generally ship between 1,500 and 3,000 packages per day and up to approximately 6,000 packages per day during peak periods.

During the years ended December 31, 2018 , 2017 and 2016 our sales were almost entirely to customers located in the United States and no single customer accounted for more than 1% of our total net revenue.

Additional Offerings

We offer additional products or services that may complement our primary retail offerings, but are not significant to our retail revenues. These include:

Our international business where we offer products to customers outside the United States using third party logistics providers;
Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the world to help improve the lives of people in emerging economies;
Pet Adoptions, a free service and portal within our Website that leverages our technology to display pets available for adoption from shelters across the United States;
Overstock Hotels, portal within our Website that enables customers to search and book hundreds of thousands of properties worldwide, including big box brands, modern boutiques, and more;
Supplier Oasis, a single integration point through which our partners can manage their products, inventory and sales channels, and also obtain multi-channel fulfillment services through our distribution network; and
Businesses advertising products or services on our Website.

Our Retail revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflecting higher consumer holiday spending. While we had lower sales volume during Q4 2018, we anticipate the trend of higher sales volume during our fourth quarter to continue for the foreseeable future. To the extent possible we maintain supplier relationships, and seek new supplier relationships for our retail businesses, and also use our working capital, to ensure a continuous allotment of product offerings for our customers.


46


Strategies for Our Retail Business

Our strategies for our Retail business include:

Improve the shopping experience and improve our organic search rankings - We have developed and implemented initiatives intended to enhance the shopping experience both for how customers and search engines experience our site. Over the last four months we have begun to see improvements in our organic search engine rankings. We believe we have found a set of initiatives that appears to be fueling this recovery. We intend to continue to focus on supporting these initiatives so that we may drive more organic traffic and improved conversion rates on our website.

Leverage new personalization tech stack in Marketing - Over the course of the past 18-months, we have created a new marketing tech stack that allows for more real-time relational marketing. We believe this platform is improving relevance of ads to customers and enhancing their interactions with our business.

Expand Club O rewards program to enhance customer loyalty - We believe that membership in our Club O rewards program increases customer engagement. We have also seen strong program growth in 2018 and we intend to make additional enhancements in the program, primarily to increase the attractiveness of the program to customers, including increasing member benefits and developing additional personalization programs.

Improve our delivery experience by expanding distribution facilities and third-party logistics services - We offer third-party logistics services to our partners, and in 2018 we added a third distribution facility to speed shipping and improve our overall customer experience. Partners participating in this program store products in one or more of our warehouses, which benefits our customers by providing same-day order fulfillment and quicker delivery, as well as reduced cost.

Expand technology platforms - We are building platforms that automate vendor management, product pricing, website personalization and search relevance. We intend to make additional enhancements in automation, technology, and engineering resources in order to further improve our customers' shopping experience.

Improve product content for our private label program - We launched our private label initiative in the third quarter of 2017. We have developed and are currently offering several private label brands and have more than 25,000 private label products available on our Website. We are working to improve the quality of content and photography on those products to enhance the shopping experience. We believe that private label brands can generate significant brand equity and customer loyalty.

Our ability to pursue some or all of these plans, and the extent to which we would be able to pursue some or all of them, will depend on the resources we have available, and may require significantly more capital than we currently have. See Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."

Medici Business Initiatives

Our Medici business initiatives seek to develop and advance the concepts of "Government as a Service" and a "Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage the transparency and immutability of blockchain technology to generate efficiencies and increase security and control in six areas of civilizational necessity: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. Our wholly-owned subsidiary, Medici Ventures, conducts a majority of its business through its majority-owned subsidiary tZERO, a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. Medici Ventures also holds minority equity interests in several technology companies, each of which focuses on at least one of the Government as a Service areas mentioned above.

tZERO Business Initiatives

tZERO is a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. tZERO’s primary focus at present is on its recent launch of a facility for the trading of digital securities tokens and on its joint venture with BOX Digital Markets LLC ("BOX Digital") intended to develop a U.S. national securities exchange (the "Exchange") with regulatory approvals that would enable the Exchange to trade digital securities.

tZERO continues to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of interests to add to the services and expertise it offers its customers. Subject to board approval, tZERO's management exercises

47


substantial discretion in identifying appropriate strategic transactions and negotiating the terms of such transactions. Management's determinations are based on numerous financial, strategic and operational assumptions, and there can be no assurance that such assumptions will prove to be true. Moreover, such strategic transactions may fail to produce the benefits expected at the time of tZERO's acquisitions or purchases of interests.

The businesses, products, and services that tZERO is pursuing or contemplating will require substantial additional funding, initially for technology development and regulatory compliance, as well as for working capital, marketing and sales, and other substantial costs of developing new products and businesses in emerging areas of technology. These costs have been and are expected to continue to be material, both to tZERO and to Overstock.

Business Segments

As described further in Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments, contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K, we determined our segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. Our Retail business is a reportable segment. As described below, our Medici business is comprised of many components or operating segments, including our tZERO reportable segment. We use pre-tax net income (loss) as the measure to determine our reportable segments. As a result, tZERO is the only reportable segment of our Medici business as it is quantitatively significant. The remaining Medici business operating segments are not significant and are included in Other. See Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments for information regarding our business segments and geographical areas.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The Securities and Exchange Commission ("SEC") has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:

revenue recognition; and
accounting for the tZERO security token offering.
 
Revenue recognition

We derive our revenue primarily from our retail business through our Website from merchandise sold at a point in time and shipped to customers. When we are the principal in a transaction and control the specific good or service before it is transferred to the customer, revenue is recorded gross; otherwise, revenue is recorded on a net basis.

Revenue is recognized when control of the product passes to the customer, typically at the date of delivery of the merchandise to the customer or the date a service is provided, and is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered.

As we ship high volumes of packages through multiple carriers, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times based on historical data. However, actual shipping times may differ from our estimates.
    
    

48


The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and income before taxes for the year ended December 31, 2018 (in thousands):
 
 
Year Ended 
 December 31, 2018
Change in the Estimate of Average Transit Times (Days)
 
Increase (Decrease)
Revenue
 
Increase (Decrease)
Income Before Tax
2
 
$
(8,258
)
 
$
(1,263
)
1
 
$
(4,246
)
 
$
(645
)
As reported
 
 As reported

 
As reported

(1)
 
$
5,750

 
$
900

(2)
 
$
10,458

 
$
1,620


Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the merchandise, and fees charged to customers are included in net revenue upon completion of our performance obligation. We present revenue net of sales tax, discounts, and expected refunds.

Our merchandise sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns. 

We recognize gift cards and Club O rewards in the period they are redeemed. Unredeemed gift cards and Club O rewards not subject to requirements to remit balances to governmental agencies are recognized as net revenue based on historical redemption patterns.

Our Other revenue occurs primarily through our broker dealer subsidiaries in our tZERO segment. We recognize revenue for our broker dealer subsidiaries based on the gross amount of consideration that we expect to receive on securities transactions (commission revenue) on a trade date basis.

Accounting for the tZERO security token offering

The Simple Agreements for Future Equity ("SAFEs") offered through the tZERO security token offering were accounted for as a prepaid contract to obtain equity interest in tZERO and were classified as a component of noncontrolling interest in our consolidated financial statements. The tZERO Preferred Equity Tokens ("tZERO Security Tokens") represent a form of preferred stock and are classified as a component of noncontrolling interest within our consolidated financial statements.

For information about recent accounting pronouncements, see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies.

Financial Outlook for the Quarter ending March 31, 2019

During 2018, we increased spending, especially in our sales and marketing, primarily due to our effort to aggressively
pursue increased revenue and new customers in our retail business. This effort resulted in significantly increased spending in the sponsored search, display ads on social media, and television marketing channels, which continued through early August 2018 when we began reducing our sales and marketing spend as we sought to return to our past strategy which seeks to optimize the near-term return on our sales and marketing expenditures.

Beginning in January 2019, we began implementing plans to further improve the efficiency of our operations, including staff reductions, reducing third party expenses, and process streamlining. Additionally, we intend to further reduce our general and administrative costs throughout 2019.

In Q1 2019, as a result of our return to a disciplined approach to marketing, we expect a decline in our consolidated net revenues compared to the same period in the prior year of 17% to 19%. In addition, excluding severance costs and any other special items, we expect to incur a total pre-tax loss of approximately $36 million in Q1 2019 ($20 million Retail, $11 million tZERO, and $5 million Other).


49


Our estimated results for the quarter ended March 31, 2019 are preliminary and subject to substantial uncertainty and numerous risks including those outlined in Item 1A of Part I, "Risk Factors". We caution you that our estimates are forward-looking statements and are not guarantees of future performance or outcomes and that actual results may differ materially.


Comparison of Years Ended December 31, 2018 and 2017

Executive Commentary

This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read "Special Cautionary Note Regarding Forward-Looking Statements."

Revenue increased 4% in 2018 compared to 2017. This increase was primarily driven by increased marketing expenses as we more aggressively pursued revenue growth and new customers, a retail marketing strategy that we continued through early August 2018. This resulted in a 2% increase in orders for the year, and we also saw a 5% increase in average order size (excluding promotional activities) primarily due to a continued sales mix shift into higher priced products. These increases were partially offset by increased promotional activities, including coupons and site sales (which we recognize as a reduction of revenue), due to our driving a higher proportion of our sales using such promotions, and an increase in marketplace sales (for which we record only our commission as revenue). While we have seen improvements in our natural search rankings, we continue to face challenges in our natural search marketing, which have significantly limited our efforts to grow revenue efficiently.

Gross profit in 2018 increased 4% compared to 2017 primarily as a result of increased revenue. Gross margin decreased to 19.4% in 2018, compared to 19.5% in 2017. The decrease in gross margin was primarily due to increased promotional activities, partially offset by a continued shift in sales mix into higher margin products and an increase in marketplace sales (for which we record only our commission as revenue).

Sales and marketing expenses as a percentage of revenue increased from 10.4% to 15.1% in 2018 as compared to 2017, primarily due to our effort to aggressively pursue increased revenue and new customers. This effort consisted of significantly increased spending in the sponsored search, display ads on social media, and television marketing channels, and continued through early August when we shifted our retail strategy to reduce these expenses. We also had an $8.3 million increase in staff-related costs, including $2.9 million at tZERO for employee severance and a special restricted stock grant which fully vested during Q1 2018.

Technology expenses in 2018 increased $16.3 million compared to 2017 primarily due to an $11.8 million increase in staff-related costs, and a $9.5 million increase in technology licenses. These increases were partially offset by a $2.9 million decrease in depreciation expense and a $2.7 million decrease in maintenance costs.

General and administrative expenses in 2018 increased $73.8 million compared to 2017, primarily due to a $20.7 million increase in legal costs largely related to our gift card escheatment case in Delaware and costs related to the tZERO SEC investigation and pursuing our strategic alternatives, a $20.4 million increase in staff-related costs, and a $12.8 million increase in consulting and outside services expenses. In addition, we had a $6.0 million increase in impairments on indefinite-lived intangible assets, and a $3.6 million increase in losses on the disposal of various businesses and assets.

We continue to seek opportunities for growth, in our retail business and through our Medici and tZERO blockchain and financial technology initiatives and through other means. As a result of these initiatives, we will continue to incur additional
expenses and may purchase interests in, or make acquisitions of, other technologies or businesses. We anticipate that our
initiatives will cause us to incur losses in the foreseeable future. These losses, additional expenses, acquisitions, or purchases
may be material, and, coupled with existing marketing expense trends and strategic changes in our retail business, may lead to
increased consolidated losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment
charges from our ownership interest in other entities.


50


Additional commentary related to Medici Ventures

The majority of Medici Ventures' business is its 80% interest in tZERO, which is described below. The remaining business activities of Medici Ventures are focused on developing and advancing blockchain technology. As a result of its business model of providing technical assistance to companies in which Medici Ventures owns an interest, as well as the early stage of development of the companies in which it owns interests, Medici Ventures has not yet generated material revenues. Medici Ventures intends to continue to acquire strategic equity interests in blockchain-related companies, with a focus on companies to which Medici Ventures believes it can provide technical or managerial assistance from time to time. For the year ended December 31, 2018, our pre-tax loss in our Medici Ventures business, excluding our loss in our tZERO business, was $20.5 million , and we expect to continue to incur significant losses in our Medici Ventures business during 2019. As of December 31, 2018 , we have spent approximately $209.6 million in our Medici business since its inception, with the majority of that being spent in tZERO.

Additional commentary related to tZERO

To date, tZERO has focused on developing its non-blockchain and blockchain businesses and exploring opportunities for novel applications of blockchain technology. tZERO does not yet have customers or backlog orders and has not yet generated revenue from any commercially available blockchain-based applications. The businesses, products, and services that tZERO is pursuing or contemplating will require substantial additional funding, initially for technology development and regulatory compliance, as well as for working capital, marketing and sales, and other substantial costs of developing new products and businesses in emerging areas of technology. For the year ended December 31, 2018, our pre-tax loss in our tZERO business, excluding our loss in the non-tZERO portion of our Medici business, was $40.9 million , and we expect to continue to incur significant losses in our Medici Ventures business during 2019. As of December 31, 2018 , we have spent approximately $143.5 million in our tZERO business since its inception. The costs have been and are expected to continue to be material, both to tZERO and to Overstock.

Results of Operations
 
Revenues and cost of goods sold recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of operations. "Retail" includes retail revenue and costs of goods sold from both "Direct" and "Partner" transactions. "Other" includes revenues and costs of goods sold related to our Medici business. In addition, we have recast the prior period revenues and cost of goods sold to conform with current year presentation.

51



The following table sets forth our results of operations expressed as a percentage of total net revenue for the years ended December 31, 2018 , 2017 and 2016 :
 
 
Year ended December 31
 
 
2018
 
2017
 
2016
 
 
(as a percentage of total revenue)
Revenue, net
 
 

 
 

 
 

Retail
 
98.8
 %
 
99.0
 %
 
99.2
 %
Other
 
1.2

 
1.0

 
0.8

Total net revenue
 
100.0

 
100.0

 
100.0

Cost of goods sold
 
 
 
 
 
 
Retail
 
79.7

 
79.8

 
81.0

Other
 
0.9

 
0.7

 
0.6

Total cost of goods sold
 
80.6

 
80.5

 
81.6

Gross profit
 
19.4

 
19.5

 
18.4

Operating expenses:
 
 
 
 
 
 
Sales and marketing
 
15.1

 
10.4

 
8.2

Technology
 
7.3

 
6.6

 
5.9

General and administrative
 
9.0

 
5.2

 
5.0

Litigation settlement
 

 

 
(1.1
)
Total operating expenses
 
31.4

 
22.2

 
18.0

Operating income (loss)
 
(11.9
)
 
(2.7
)
 
0.4

Interest income
 
0.1

 

 

Interest expense
 
(0.1
)
 
(0.2
)
 

Other income (expense), net
 
(0.2
)
 
0.1

 
0.8

Income (loss) before income taxes
 
(12.1
)
 
(2.7
)
 
1.2

Provision (benefit) for income taxes
 
(0.1
)
 
3.7

 
0.5

Consolidated net income (loss)
 
(11.9
)%
 
(6.5
)%
 
0.7
 %
  
Revenue

The following table reflects our net revenue for the years ended December 31, 2018 and 2017 (in thousands):
 
 
Year ended
 December 31,
 
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Revenue, net
 
 

 
 

 
 

 
 

Retail
 
$
1,800,187

 
$
1,728,104

 
$
72,083

 
4.2
%
Other
 
21,405

 
16,652

 
4,753

 
28.5
%
Total revenue, net
 
$
1,821,592

 
$
1,744,756

 
$
76,836

 
4.4
%

The increased total net revenue for the twelve months ended December 31, 2018, as compared to the same period in 2017, was primarily driven by increased marketing expenses as we more aggressively pursued revenue growth and new customers, a retail marketing strategy that we continued through early August 2018. This resulted in a 2% increase in orders for the year, and we also saw a 5% increase in average order size (excluding promotional activities) primarily due to a continued sales mix shift into higher-priced products. These increases were partially offset by increased promotional activities, including coupons and site sales (which we recognize as a reduction of revenue), due to our driving a higher proportion of our sales using such promotions, and an increase in marketplace sales (for which we record only our commission as revenue). While we have seen improvements in our natural search rankings, we continue to face challenges in our natural search marketing, which have significantly limited our efforts to grow revenue efficiently.


52


We continue to seek increased participation in our Club O loyalty program, including, in certain instances, by increasing Club O Rewards to our Club O members in lieu of coupons we offer to all customers. For additional information regarding our Club O loyalty program see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies, Club O loyalty program .
 
The products and product lines we offer, and their respective percentages of our revenue, are based on many factors including customer demand, our marketing efforts, promotional pricing, joint-marketing offered by our suppliers, the types of inventory we are able to obtain and the number of SKUs we offer. These factors change frequently and can affect the mix of the product lines we sell. We have experienced a trend toward our home and garden category in recent years and we have recently focused our marketing and branding efforts towards our home and garden products. We are also working to increase the number of SKUs we offer. While we do not currently expect any material shifts in our product line mix, the relative amounts of the product lines we sell, and the revenue we earn from those product lines, is generally an economic result of the factors described above, which may change from time to time.

International sales were less than 3% of total net revenues for 2018 and 2017 .

Gross profit and gross margin
 
Our overall gross margins fluctuate based on changes in supplier cost and / or sales price, including competitive pricing; inventory management decisions; sales coupons and promotions; product mix of sales; and operational and fulfillment costs.

The following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31, 2018 and 2017 (in thousands):
 
 
Year ended December 31,
 
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Revenue, net
 
 

 
 

 
 

 
 

Retail
 
$
1,800,187

 
$
1,728,104

 
$
72,083

 
4.2
%
Other
 
21,405

 
16,652

 
4,753

 
28.5
%
Total net revenue
 
1,821,592


1,744,756

 
76,836

 
4.4
%
Cost of goods sold
 
 

 
 

 
 

 
 

Retail
 
1,452,195

 
1,392,558

 
59,637

 
4.3
%
Other
 
15,489

 
11,647

 
3,842

 
33.0
%
Total cost of goods sold
 
1,467,684

 
1,404,205

 
63,479

 
4.5
%
Gross Profit
 
 

 
 

 
 

 
 

Retail
 
347,992

 
335,546

 
12,446

 
3.7
%
Other
 
5,916

 
5,005

 
911

 
18.2
%
Total gross profit
 
$
353,908

 
$
340,551

 
$
13,357

 
3.9
%

Gross margins for the past eight quarterly periods and years ending December 31, 2018 and 2017 were:
 
 
Q1 2018
 
Q2 2018
 
Q3 2018
 
Q4 2018
 
FY 2018
Retail
 
21.0
%
 
18.9
%
 
19.5
%
 
17.9
%
 
19.3
%
Other
 
27.2
%
 
24.1
%
 
33.1
%
 
26.8
%
 
27.6
%
Combined
 
21.1
%
 
19.0
%
 
19.7
%
 
18.0
%
 
19.4
%
 
 
Q1 2017
 
Q2 2017
 
Q3 2017
 
Q4 2017
 
FY 2017
Retail
 
20.0
%
 
19.4
%
 
19.6
%
 
18.7
%
 
19.4
%
Other
 
24.8
%
 
30.8
%
 
33.2
%
 
31.7
%
 
30.1
%
Combined
 
20.1
%
 
19.5
%
 
19.7
%
 
18.8
%
 
19.5
%

Gross profit for the twelve months ended December 31, 2018 increased 4% compared to the same period in 2017 primarily as a result of increased revenue. Gross margin decreased to 19.4% for the twelve months ended December 31, 2018, compared to 19.5% for the same period in 2017. The decrease in gross margin was primarily due to increased promotional

53


activities, partially offset by a continued shift in sales mix into higher margin products and an increase in marketplace sales (for which we record only our commission as revenue).

Cost of goods sold includes stock-based compensation expense of $201,000 and $183,000 for the years ended December 31, 2018 and 2017 , respectively.
 
Fulfillment costs

Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit card fees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry.
 
The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit and margin, thus enabling investors to better compare our gross margin with others in our industry (in thousands):
 
 
Year ended December 31,
 
 
2018
 
2017
Total revenue, net
 
$
1,821,592

 
100%
 
$
1,744,756

 
100%
Cost of goods sold
 
 

 
 
 
 

 
 
Product costs and other cost of goods sold
 
1,390,750

 
76.3%
 
1,328,749

 
76.2%
Fulfillment and related costs
 
76,934

 
4.2%
 
75,456

 
4.3%
Total cost of goods sold
 
1,467,684

 
80.6%
 
1,404,205

 
80.5%
Gross profit
 
$
353,908

 
19.4%
 
$
340,551

 
19.5%
 
Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees. Fulfillment and related costs remained relatively flat during the year ended December 31, 2018 as compared to 2017 .
 
See Gross profit and gross margin above for additional discussion.
 
Operating expenses
 
Sales and marketing expenses

 We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through keywords, product listing ads, display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail and viral and social media campaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.

The following table reflects our sales and marketing expenses for the years ended December 31, 2018 and 2017 (in thousands):
 
 
Year ended
 December 31,
 
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Sales and marketing expenses
 
$
274,479

 
$
180,589

 
$
93,890

 
52.0
%
Sales and marketing expenses as a percent of net revenues
 
15.1
%
 
10.4
%
 
 
 
 

 
The 472 basis point increase in sales and marketing expenses as a percentage of revenue for the twelve months ended December 31, 2018, as compared to the same period in 2017, was primarily due to our effort to aggressively pursue increased revenue and new customers. This effort consisted of significantly increased spending in the sponsored search, display ads on social media, and television marketing channels, and continued through early August when we shifted our retail strategy to

54


reduce these expenses. We also had an $8.3 million increase in staff-related costs, including $2.9 million at tZERO for employee severance and a special restricted stock grant which fully vested during Q1 2018.

We are also experiencing an increasingly competitive digital marketing landscape. We have competitors who are spending significant amounts on advertising bidding up the cost of certain marketing channels, such as paid keywords. While we may not choose to match their levels of spending, this has increased our marketing costs in recent quarters. We expect this trend to continue. However, we do have a number of important digital marketing initiatives that we are testing and implementing that we believe will improve our competitive position in this area.

Sales and marketing expenses include stock-based compensation expense of $1.7 million and $415,000 for the years ended December 31, 2018 and 2017 , respectively.

We do not include costs associated with our discounted shipping and other promotions, such as coupons in sales and marketing expense. Rather, we account for them as a reduction of revenue and therefore affect sales and gross margin. We consider discounted shipping and other promotions, such as our policy of free shipping on orders over $45, as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.

Technology expenses

We seek to invest efficiently in technology, including web services, customer support solutions, website search, expansion of new and existing product categories, and in technology to enhance the customer experience, improve our process efficiency and support and expand our logistics infrastructure. We may increase our technology expenses to support these initiatives and these increases may be material.

The frequency and variety of cyberattacks on our Website, our corporate systems, and on third parties we use to support our technology continues to increase. The impact of such attacks, their costs, and the costs we incur to protect ourselves against future attacks have not been material. However, we consider the risk introduced by cyberattacks to be serious and will continue to incur costs related to efforts to protect ourselves against them.

The following table reflects our technology expenses for the years ended December 31, 2018 and 2017 (in thousands):
 
 
Year ended
 December 31,
 
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Technology expenses
 
$
132,154

 
$
115,878

 
$
16,276

 
14.0
%
Technology expenses as a percent of net revenues
 
7.3
%
 
6.6
%
 
 

 
 


The $16.3 million increase in technology costs for the twelve months ended December 31, 2018, as compared to the same period in 2017, was primarily due to an $11.8 million increase in staff-related costs, and a $9.5 million increase in technology licenses, partially offset by a $2.9 million decrease in depreciation expense and a $2.7 million decrease in maintenance costs.

Technology expenses include stock-based compensation expense of $2.1 million and $649,000 for the years ended December 31, 2018 and 2017 , respectively.

General and administrative expenses
 
The following table reflects our general and administrative expenses ("G&A") for the years ended December 31, 2018 and 2017 (in thousands):
 
 
Year ended
 December 31,
 
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
General and administrative expenses
 
$
164,481

 
$
90,718

 
$
73,763

 
81.3
%
General and administrative expenses as a percent of net revenues
 
9.0
%
 
5.2
%
 
 

 
 


The $73.8 million increase in general and administrative expenses for the twelve months ended December 31, 2018, as compared to the same period in 2017, was primarily due to a $20.7 million increase in legal costs and accrued contingencies largely related to our gift card escheatment case in Delaware and costs related to the tZERO SEC investigation and pursuing our strategic

55


alternatives, a $20.4 million increase in staff-related costs, and a $12.8 million increase in consulting and outside services expenses. In addition, we had a $6.0 million increase in impairments on indefinite-lived intangible assets, and a $3.6 million increase in losses on the disposal of various businesses and assets.

G&A expenses include stock-based compensation expense of approximately $10.4 million and $2.8 million for the years ended December 31, 2018 and 2017 , respectively.
    
We continue to seek opportunities for growth, in our retail business and through our Medici blockchain and financial technology initiatives and through other means. As a result of these initiatives, we will continue to incur additional expenses and may purchase interests in, or make acquisitions of, other technologies or businesses. We anticipate that our initiatives may cause us to incur losses in the foreseeable future. These losses, additional expenses, acquisitions, or purchases may be material, and, coupled with existing marketing expense trends and strategic changes in our retail business, may lead to increased consolidated losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment charges from our ownership interest in other entities.

Litigation settlement

In Q1 2016, we entered into a settlement agreement in our prime broker litigation which concluded the litigation in its entirety and we recognized settlement proceeds of $19.5 million. Related costs associated with the litigation and settlement of approximately $1.0 million were included in G&A expenses during Q1 2016.

Depreciation and amortization expense

Depreciation expense is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands):
 
 
Year ended
 December 31,
 
 
2018
 
2017
Cost of goods sold - retail
 
$
354

 
$
307

Technology
 
21,894

 
24,604

General and administrative
 
4,163

 
3,937

Total depreciation, including internal-use software and website development
 
$
26,411

 
$
28,848

 
Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands):
 
 
Year ended
 December 31,
 
 
2018
 
2017
Technology
 
$
3,424

 
$
3,620

Sales and marketing
 
460

 
83

General and administrative
 
1,402

 
296

Total amortization
 
$
5,286

 
$
3,999

Non-operating income (expense)

Interest expense
 
Total interest expense decreased $1.5 million, from $2.9 million for the twelve months ended December 31, 2017 to $1.5 million for the twelve months ended December 31, 2018. The decrease in interest expense is primarily due to paying off the PCL Loan in May 2018.

Other income (expense), net

Other income (expense), net for the twelve months ended December 31, 2018 was ($3.5 million) as compared to $1.2 million in 2017. The decrease is primarily due to a $4.6 million increase in losses on equity holdings and other assets, and a $2.7

56


million decrease in Club O and gift card breakage, which we began recognizing as a component of revenue in 2018 following the adoption of ASC 606, partially offset by a $2.2 million decrease in debt retirement charges.

Income taxes
 
Our effective tax rate for the years ended December 31, 2018 and 2017 was 1.1% and (134.5)%, respectively. Our effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation allowances. It is also affected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. The decrease in the 2018 effective tax rate relative to the 2017 effective tax rate is primarily attributable to our valuation allowance against our net deferred tax assets which was established at the end of 2017, the act of which caused a significant change in the 2017 rate.

We have indefinitely reinvested foreign earnings of $1.4 million at December 31, 2018. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.

Seasonality
 
Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season and gross margin decreases due to increased sales of certain lower margin products, such as electronics. Revenue typically decreases in the following quarter(s), as shown in the table below. The actual quarterly results for each quarter could differ materially depending upon consumer preferences, availability of product and competition, among other risks and uncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future.
 
The following table reflects our total net revenues for each of the quarters in 2018 , 2017 and 2016 (in thousands):
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
2018
 
$
445,331

 
$
483,133

 
$
440,580

 
$
452,548

2017
 
$
432,435

 
$
432,024

 
$
424,007

 
$
456,290

2016
 
$
413,677

 
$
418,540

 
$
441,564

 
$
526,182

 

Comparison of Years Ended December 31, 2017 and 2016

Executive Commentary

This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read "Special Cautionary Note Regarding Forward-Looking Statements."

Our $111.9 million consolidated net loss in 2017 was the result primarily of our $46.6 million operating loss in 2017 and our $64.2 million income tax expense in 2017. The operating loss was caused primarily by changes that Google made in its natural search engine algorithms and an increasingly competitive digital marketing landscape. The income tax expense included $25.3 million of expense caused by the enactment in late December 2017 of the TCJA and $59.0 million of expense caused by our establishment of a valuation allowance against our net deferred tax assets at December 31, 2017. These matters are discussed in more detail below.

Revenues in 2017 decreased 3% compared to 2016. Beginning in mid-2017 and continuing in the fourth quarter of 2017, we experienced difficulties which we believe were due in part to changes that Google, Inc. ("Google") has made in its natural search engine algorithms. This decrease to revenue was partially offset by efforts to increase revenue in other marketing channels such as sponsored search and email.


57


Gross profit in 2017 increased 3% compared to 2016 primarily as a result of increased gross margin. Gross margin increased to 19.5% in 2017 compared to 18.4% in 2016. The increase in gross margin was primarily due to a continued shift in sales mix into higher margin products and an increase in marketplace sales (which we recognize on a net basis), partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions.

Sales and marketing expenses as a percentage of revenue increased from 8.2% to 10.4% in 2017 as compared to 2016, primarily due to increased spending in the sponsored search and display ads on social media marketing channels, due in part to our seeking to increase revenue in these channels to partially offset the effects of the Google algorithm changes described above.

Technology expenses in 2017 increased $9.1 million compared to 2016 primarily due to an increase in staff related costs of $4.9 million, and an increase in technology licenses and maintenance costs of $4.0 million.

General and administrative expenses in 2017 increased $1.4 million compared to 2016, primarily due to an increase in staff related costs of $4.9 million, partially offset by a decrease in legal fees of $3.0 million, and a decrease in bad debt expense of $1.1 million.

Our provision for income taxes totaled $64.2 million and $9.3 million for 2017 and 2016, respectively. The increase in 2017 expense compared to 2016 is primarily attributable to our decision to establish a valuation allowance against our net deferred tax assets, as well as the impact of the TCJA. On December 22, 2017, the President signed into law the TCJA. Among many other changes, the new law lowers the corporate tax rate from 35% to 21% for tax years beginning in 2018. Therefore, we re-valued our deferred tax assets in 2017 due to the federal rate reduction, which resulted in an increase in our 2017 income tax expense of $25.3 million. Additionally, each quarter we assess available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. Due to losses incurred in 2017 and the potential for future losses, we have recorded a valuation allowance on our deferred tax assets, net of deferred tax liabilities, which further increased our 2017 income tax expense by $59.0 million.

The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information about the matters discussed above and other important matters affecting our business.

Results of Operations
 
Revenues and cost of goods sold recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of operations. "Retail" includes retail revenue and costs of goods sold from both "Direct" and "Partner" transactions. "Other" includes revenues and costs of goods sold related to our Medici business. In addition, we have recast the prior period revenues and cost of goods sold to conform with current year presentation.

58



The following table sets forth our results of operations expressed as a percentage of total net revenue for the years ended December 31, 2017, 2016 and 2015:
 
 
Year ended December 31
 
 
2017
 
2016
 
2015
 
 
(as a percentage of total revenue)
Revenue, net
 
 

 
 

 
 

Retail
 
99.0
 %
 
99.2
 %
 
99.9
 %
Other
 
1.0

 
0.8

 
0.1

Total net revenue
 
100.0

 
100.0

 
100.0

Cost of goods sold
 
 
 
 
 
 
Retail
 
79.8

 
81.0

 
81.6

Other
 
0.7

 
0.6

 

Total cost of goods sold
 
80.5

 
81.6

 
81.6

Gross profit
 
19.5

 
18.4

 
18.4

Operating expenses:
 
 
 
 
 
 
Sales and marketing
 
10.4

 
8.2

 
7.5

Technology
 
6.6

 
5.9

 
5.9

General and administrative
 
5.2

 
5.0

 
5.0

Litigation settlement
 

 
(1.1
)
 

Total operating expenses
 
22.2

 
18.0

 
18.4

Operating income (loss)
 
(2.7
)
 
0.4

 

Interest income
 

 

 

Interest expense
 
(0.2
)
 

 

Other income, net
 
0.1

 
0.8

 
0.2

Income (loss) before income taxes
 
(2.8
)
 
1.2

 
0.2

Provision for income taxes
 
3.7

 
0.5

 
0.1

Consolidated net income (loss)
 
(6.5
)%
 
0.7
 %
 
0.1
 %
  
Revenue

The following table reflects our net revenue for the years ended December 31, 2017 and 2016 (in thousands):
 
 
Year ended
 December 31,
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Revenue, net
 
 

 
 

 
 

 
 

Retail
 
$
1,728,104

 
$
1,784,782

 
$
(56,678
)
 
(3.2
)%
Other
 
16,652

 
15,181

 
1,471

 
9.7
 %
Total revenue, net
 
$
1,744,756

 
$
1,799,963

 
$
(55,207
)
 
(3.1
)%

The decrease in total net revenue for the year ended December 31, 2017, as compared to the same period in 2016, was due in part to changes that we believe Google has made in its natural search engine algorithms. In addition, we had an increase in product sales for which we record only our commission as revenue, and an increase in promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions.

The products and product lines we offer, and their respective percentages of our revenue, are based on many factors including customer demand, our marketing efforts, promotional pricing, joint-marketing offered by our suppliers, the types of inventory we are able to obtain and the number of SKUs we offer. These factors change frequently and can affect the mix of the product lines we sell. We have experienced a trend toward our home and garden category in recent years and we have recently focused our marketing and branding efforts towards our home and garden products. We are also working to increase the number of SKUs we offer. While we do not currently expect any material shifts in our product line mix, the relative amounts of the

59


product lines we sell, and the revenue we earn from those product lines, is generally an economic result of the factors described above, which may change from time to time.

International sales were less than 3% of total net revenues for 2017 and 2016.

Gross profit and gross margin
 
Our overall gross margins fluctuate based on changes in supplier cost and / or sales price, including competitive pricing; inventory management decisions; sales coupons and promotions; product mix of sales; and operational and fulfillment costs.

The following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31, 2017 and 2016 (in thousands):
 
 
Year ended December 31,
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Revenue, net
 
 

 
 

 
 

 
 

Retail
 
$
1,728,104

 
$
1,784,782

 
$
(56,678
)
 
(3.2
)%
Other
 
16,652

 
15,181

 
1,471

 
9.7
 %
Total net revenue
 
1,744,756

 
1,799,963

 
(55,207
)
 
(3.1
)%
Cost of goods sold
 
 

 
 

 
 

 
 

Retail
 
1,392,558

 
1,458,411

 
(65,853
)
 
(4.5
)%
Other
 
11,647

 
10,203

 
1,444

 
14.2
 %
Total cost of goods sold
 
1,404,205

 
1,468,614

 
(64,409
)
 
(4.4
)%
Gross Profit
 
 

 
 

 
 

 
 

Retail
 
335,546

 
326,371

 
9,175

 
2.8
 %
Other
 
5,005

 
4,978

 
27

 
0.5
 %
Total gross profit
 
$
340,551

 
$
331,349

 
$
9,202

 
2.8
 %

Gross margins for the past eight quarterly periods and years ending December 31, 2017 and 2016 were:
 
 
Q1 2017
 
Q2 2017
 
Q3 2017
 
Q4 2017
 
FY 2017
Retail
 
20.0
%
 
19.4
%
 
19.6
%
 
18.7
%
 
19.4
%
Other
 
24.8
%
 
30.8
%
 
33.2
%
 
31.7
%
 
30.1
%
Combined
 
20.1
%
 
19.5
%
 
19.7
%
 
18.8
%
 
19.5
%
 
 
Q1 2016
 
Q2 2016
 
Q3 2016
 
Q4 2016
 
FY 2016
Retail
 
18.5
%
 
18.1
%
 
17.9
%
 
18.6
%
 
18.3
%
Other
 
39.5
%
 
33.8
%
 
35.1
%
 
26.0
%
 
32.8
%
Combined
 
18.7
%
 
18.2
%
 
18.1
%
 
18.6
%
 
18.4
%

Gross profit for the year ended December 31, 2017 increased 3% compared to the same period in 2016 primarily as a result of increased gross margin. Gross margin increased to 19.5% for the year ended December 31, 2017 compared to 18.4% for the same period in 2016. This increase in gross margin was primarily due to a continued shift in sales mix into higher margin products and an increase in marketplace sales (which we recognize on a net basis), partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions.

Cost of goods sold includes stock-based compensation expense of $183,000 and $266,000 for the years ended December 31, 2017 and 2016, respectively.
 
Fulfillment costs

Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit card fees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs

60


within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry.
 
The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit and margin, thus enabling investors to better compare our gross margin with others in our industry (in thousands):
 
 
Year ended December 31,
 
 
2017
 
2016
Total revenue, net
 
$
1,744,756

 
100%
 
$
1,799,963

 
100%
Cost of goods sold
 
 

 
 
 
 

 
 
Product costs and other cost of goods sold
 
1,328,749

 
76.2%
 
1,391,736

 
77.3%
Fulfillment and related costs
 
75,456

 
4.3%
 
76,878

 
4.3%
Total cost of goods sold
 
1,404,205

 
80.5%
 
1,468,614

 
81.6%
Gross profit
 
$
340,551

 
19.5%
 
$
331,349

 
18.4%
 
Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees. Fulfillment and related costs remained relatively flat during the year ended December 31, 2017 as compared to 2016.
 
See Gross profit and gross margin above for additional discussion.
 
Operating expenses
 
Sales and marketing expenses

 We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through keywords, product listing ads, display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail and viral and social media campaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.

The following table reflects our sales and marketing expenses for the years ended December 31, 2017 and 2016 (in thousands):
 
 
Year ended
 December 31,
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales and marketing expenses
 
$
180,589

 
$
147,896

 
$
32,693

 
22.1
%
Sales and marketing expenses as a percent of net revenues
 
10.4
%
 
8.2
%
 
 
 
 

 
The 220 basis point increase in sales and marketing expenses as a percentage of revenue for the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to increased spending in sponsored search and display ads on social media, and television marketing channels, and increased staff related costs.

Sales and marketing expenses include stock-based compensation expense of $415,000 and $249,000 for the years ended December 31, 2017 and 2016, respectively.

We do not include costs associated with our discounted shipping and other promotions, such as coupons in sales and marketing expense. Rather, we account for them as a reduction of revenue and therefore affect sales and gross margin. We consider discounted shipping and other promotions, such as our policy of free shipping on orders over $45, as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.


61


Technology expenses

We seek to invest efficiently in technology, including web services, customer support solutions, website search, expansion of new and existing product categories, and in technology to enhance the customer experience, improve our process efficiency and support and expand our logistics infrastructure.

The following table reflects our technology expenses for the years ended December 31, 2017 and 2016 (in thousands):
 
 
Year ended
 December 31,
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Technology expenses
 
$
115,878

 
$
106,760

 
$
9,118

 
8.5
%
Technology expenses as a percent of net revenues
 
6.6
%
 
5.9
%
 
 

 
 


The $9.1 million increase in technology costs for the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to an increase in staff related costs of $4.9 million, and an increase in technology licenses and maintenance of $4.0 million.

Technology expenses include stock-based compensation expense of $649,000 and $777,000 for the years ended December 31, 2017 and 2016, respectively.

General and administrative expenses
 
The following table reflects our general and administrative expenses ("G&A") for the years ended December 31, 2017 and 2016 (in thousands):
 
 
Year ended
 December 31,
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
General and administrative expenses
 
$
90,718

 
$
89,298

 
$
1,420

 
1.6
%
General and administrative expenses as a percent of net revenues
 
5.2
%
 
5.0
%
 
 

 
 


The $1.4 million increase in general and administrative expenses ("G&A") for the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to an increase in staff related costs of $4.9 million, partially offset by a decrease in legal fees of $3.0 million, and a decrease in bad debt expense of $1.1 million.

G&A expenses include stock-based compensation expense of approximately $2.8 million and $3.6 million for the years ended December 31, 2017 and 2016, respectively.
    
Litigation settlement

In Q1 2016, we entered into a settlement agreement in our prime broker litigation which concluded the litigation in its entirety and we recognized settlement proceeds of $19.5 million. Related costs associated with the litigation and settlement of approximately $1.0 million were included in G&A expenses during Q1 2016.


62


Depreciation and amortization expense

Depreciation expense is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands):
 
 
Year ended
 December 31,
 
 
2017
 
2016
Cost of goods sold - retail
 
$
307

 
$
310

Technology
 
24,604

 
25,693

Sales and marketing
 

 
124

General and administrative
 
3,937

 
1,156

Total depreciation, including internal-use software and website development
 
$
28,848

 
$
27,283

 
Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands):
 
 
Year ended
 December 31,
 
 
2017
 
2016
Technology
 
$
3,620

 
$
2,904

Sales and marketing
 
83

 
1,008

General and administrative
 
296

 
56

Total amortization
 
$
3,999

 
$
3,968

Non-operating income (expense)

Interest expense
 
Total interest expense increased $2.1 million, from $877,000 for the year ended December 31, 2016 to $2.9 million for the year ended December 31, 2017. The increase in interest expense is primarily due to no longer capitalizing interest on our headquarters loan due to construction completion.

Other income, net

Other income, net for the year ended December 31, 2017 was $1.2 million as compared to $14.2 million in 2016. The decrease is primarily due to a decrease in Club O Rewards breakage of $14.2 million due to discontinuing our Club O Silver rewards program in Q4 2016, an increase in impairment charges of $2.6 million related to cost method investments, and an increase in debt extinguishment costs of $2.5 million. These decreases were partially offset by an increase in realized gains on sales of non-operating assets and precious metals of $6.6 million.

Income taxes
 
Our effective tax rate for the years ended December 31, 2017 and 2016 was (134.5)% and 45.3%, respectively. Our effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation allowances. It is also affected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. The decrease in the 2017 effective tax rate relative to the 2016 effective tax rate is primarily attributable to our decision to establish a valuation allowance against our deferred tax assets, net of deferred tax liabilities, as well as the impact of the TCJA. In our decision to establish a valuation allowance, we concluded that the negative evidence outweighed the positive evidence and that it was not more likely than not that all our federal and state deferred tax assets will be realized (see Item 15 of Part IV, "Financial Statements"—Note 18. Income Taxes, contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K).

We have indefinitely reinvested foreign earnings of $1.3 million at December 31, 2017. We would need to accrue and pay various taxes on this amount if repatriated.


63


Seasonality
 
Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season and gross margin decreases due to increased sales of certain lower margin products, such as electronics. Revenue typically decreases in the following quarter(s), as shown in the table below. The actual quarterly results for each quarter could differ materially depending upon consumer preferences, availability of product and competition, among other risks and uncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future.
 
The following table reflects our total net revenues for each of the quarters in 2017, 2016 and 2015 (in thousands):
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
2017
 
$
432,435

 
$
432,024

 
$
424,007

 
$
456,290

2016
 
$
413,677

 
$
418,540

 
$
441,564

 
$
526,182

2015
 
$
398,344

 
$
388,013

 
$
391,211

 
$
480,270

 

Liquidity and Capital Resources
Overview

We are proactively seeking opportunities to improve the efficiency of our operations and are considering a comprehensive set of actions to do so. During the later end of 2018 we began taking and continue to take significant steps to realize internal cost savings, including staff reductions, and process streamlining. Additionally, we intend to further reduce costs in future periods. We believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months. We also believe that we may need to raise additional capital and/or obtain additional debt financing to be able to fully pursue some or all of our strategies, including plans for our retail business while also funding our Medici initiatives, beyond the next twelve months.

We have developed and implemented initiatives within our retail business around improving our Club O rewards program primarily to increase member benefits and to develop additional personalization programs; improving our organic search engine rankings; additional distribution facilities to speed shipping and improve our customer service; additional automation, technology and engineering resources to improve our customers' shopping experience; and improving our private label initiative to generate significant brand equity and customer loyalty. We believe these initiatives will have significant long-term positive results; however, the expenditures will likely adversely affect our short-term results. See "Strategies for Our Retail Business" above.

Our Medici initiatives also require substantial funding. Medici Ventures and its majority-owned subsidiary, tZERO, continue to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of interests to add to the services and expertise they offer their customers. See "Medici Business Initiatives" and "tZERO Business Initiatives" above.

Our ability to pursue some or all of these plans, and the extent to which we would be able to pursue some or all of them, will depend on the resources we have available, and will require significantly more capital than we currently have.

Current sources of liquidity

Our principal sources of liquidity are existing cash and cash equivalents. At December 31, 2018 , we had cash and cash equivalents of $141.5 million . Our ability to access the liquidity of our subsidiaries may be limited by tax and legal considerations and other factors.
 

64


Cash flow information is as follows (in thousands):
 
 
Year ended
 December 31,
 
 
2018
 
2017
Cash provided by (used in):
 
 

 
 

Operating activities
 
$
(138,934
)
 
$
(35,221
)
Investing activities
 
(110,923
)
 
(17,960
)
Financing activities
 
189,001

 
73,323


In August 2018, we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under which we conducted "at the market" public offerings of our common stock during the second half of 2018 and may conduct additional "at the market" public offerings of our common stock. Under the sales agreement, JonesTrading, acting as our agent, may offer our common stock in the market on a daily basis or otherwise as we request from time to time. We have no obligation to sell additional shares under the sales agreement, but expect to do so. We will pay JonesTrading up to a 2.0% sales commission on all sales. The sales agreement contemplates sales of up to $150 million of our common stock over a period of up to three years. As of December 31, 2018, we had sold 2,883,344 shares of our common stock pursuant to the sales agreement and have received $94.6 million in proceeds, net of $2.6 million of offering costs, including commissions paid to JonesTrading.

In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"), and a term sheet contemplating a sale of Overstock common stock to GSR. Concurrently, tZERO signed a term sheet contemplating a sale of tZERO common stock to GSR.

The Token Purchase Agreement sets forth the terms on which GSR agreed to purchase, for  $30 million , on May 6, 2019 or such other date as may be agreed by the parties, security tokens at a price of  $6.67  per security token. These security tokens were issued by tZERO to Overstock in satisfaction of  $30 million  of tZERO's indebtedness to Overstock. We may be required to obtain additional tokens in order to fulfill our obligations under the agreement. The agreement states that the obligations of GSR to complete the transaction described will be subject to conditions, some of which are unidentified.
 
The previously-announced GSR equity investments in Overstock and tZERO contemplated by the term sheets did not occur. However, we remain in discussions with GSR Capital and Makara Capital, a key partner of GSR Capital, regarding a potential transaction. Both have recently signed an memorandum of understanding (“MOU”) with tZERO outlining a transaction in which Makara and GSR would co-lead an investment of up to $100 million in tZERO common stock and close the transaction in April subject to due diligence, negotiation of binding contracts and regulatory approval. The investors would also assist with tZERO’s expansion in Asia and other regions of the world and link them with other key partners from their portfolios. If a definitive agreement is reached, the terms, including the amount purchased, number of shares, and/or post money valuation of tZERO, may be less favorable than the terms contemplated under the MOU. There can be no assurance that tZERO, Makara or GSR will enter into a definitive agreement regarding the proposed transaction.

Free cash flow

"Free Cash Flow" (a non-GAAP measure) for the years ended December 31, 2018 and 2017 , was $(167.6) million and $(58.8) million , respectively. See Non-GAAP Financial Measures below for a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities.

Cash flows from operating activities

For the years ended December 31, 2018 and 2017 , our operating activities resulted in net cash outflow of $138.9 million and $35.2 million , respectively.

Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our partners that generally extend beyond the amount of time necessary to collect proceeds from our customers. As a result, following our typically seasonally strong fourth quarter sales, at December 31 of each year, our cash, cash equivalents and accounts payable balances normally reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). However, our accounts payable balance normally declines during the first three months following year-end, which normally results in a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our

65


business normally causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are typically paid.

The $138.9 million of net cash used in operating activities during the year ended December 31, 2018 was primarily from a consolidated net loss of $217.6 million , partially offset by cash provided by operating assets and liabilities of $19.5 million , and certain non-cash items including depreciation and amortization expense of $31.7 million , stock-based compensation of $14.4 million , impairment losses, net of realized gains, recognized on cryptocurrency holdings of $2.1 million , loss on equity investments, net of $2.8 million , loss on disposal of business and other asset abandonments of $3.6 million , and impairment on intangible assets of $6.0 million .

The  $35.2 million  of net cash used in operating activities during the year ended December 31, 2017 was primarily from a consolidated net loss of  $111.9 million , and cash used by operating assets and liabilities of $30.3 million . These were partially offset by certain non-cash items including deferred income taxes of  $65.2 million , depreciation and amortization of $32.8 million , stock-based compensation of $4.1 million , and loss on equity investments, net of $6.0 million .

Cash flows from investing activities

For the year ended December 31, 2018 , investing activities resulted in net cash outflows of $110.9 million , primarily from purchases of equity investments of $48.7 million , expenditures for fixed assets of $28.7 million , acquisitions of businesses, net of cash acquired of $12.9 million , purchase of intangible assets of $9.6 million , deposits made in advance of $8.0 million , and disbursements for loans made of $3.1 million .

For the year ended December 31, 2017, investing activities resulted in net cash outflows of  $18.0 million , primarily from expenditures for fixed assets of  $23.6 million and purchases of equity investments of  $5.2 million , offset by proceeds from sale of precious metals of  $11.9 million .

Cash flows from financing activities
 
For the years ended December 31, 2018 and 2017 , financing activities resulted in net cash inflows of $189.0 million and $73.3 million , respectively.

The $189.0 million provided by financing activities during the year ended December 31, 2018 resulted primarily from $94.6 million of proceeds from sales of our common stock, $82.4 million of proceeds from the tZERO security token offering, $50.6 million of proceeds from sales and exercises of stock warrants, and $6.7 million of proceeds from sale of subsidiary shares, offset by $40.0 million of repayments on our PCL term loan and $4.6 million of taxes withheld upon vesting of restricted stock.

The  $73.3 million  provided by financing activities during the year ended December 31, 2017 resulted primarily from  $106.5 million  of proceeds from sales and exercises of stock warrants,  $40.0 million  of proceeds from our PCL term loan, offset by  $45.8 million  of repayments on our U.S. Bank term loan,  $15.3 million  of repayments on lease finance obligations with U.S. Bank, $10.0 million of purchases of treasury stock and  $1.2 million  of taxes withheld upon vesting of restricted stock.

Contractual Obligations and Commitments
 
The following table summarizes our contractual obligations as of December 31, 2018 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):
 
 
Payments Due by Period
Contractual Obligations
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Operating leases
 
8,822

 
7,414

 
7,654

 
7,579

 
6,677

 
19,571

 
57,717

Purchase obligations
 
2,569

 

 

 

 

 

 
2,569

Technology services
 
2,031

 
1,693

 

 

 

 

 
3,724

High bench senior credit agreement
 

 
3,069

 

 

 

 

 
3,069

Total contractual cash obligations
 
$
13,422

 
$
9,107

 
$
7,654

 
$
7,579

 
$
6,677

 
$
19,571

 
$
64,010



66


Operating leases

From time to time we enter into operating leases for facilities and equipment for use in our operations.

Purchase obligations

The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us of inventory purchase orders we had outstanding at December 31, 2018 . Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would be less.

High bench senior credit agreement

We are party to a financing agreement acquired in connection with our acquisition of Mac Warehouse, LLC (see Borrowings below). The amounts presented reflect our related principal payments.

Technology services

From time to time we enter into long-term contractual agreements for technology services and capital leases for equipment included in such service agreements.

Tax contingencies

We are involved in various tax matters, the outcomes of which are uncertain. As of December 31, 2018 and 2017 , tax contingencies were $1.5 million and $1.7 million , respectively, which are included in our reconciliation of unrecognized tax benefits (see Item 15 of Part IV, "Financial Statements"—Note 18. Income Taxes, contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K). We expect the total amount of tax contingencies to increase in the future. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities. These assessments may or may not result in changes to our contingencies related to positions on prior years' tax filings.

Borrowings

High Bench Senior Credit Agreement

On June 25, 2018, we became party to a senior credit agreement, as amended, with High Bench-Mac Warehouse-Senior Debt, LLC ("High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the amended agreement, the loan carries an annual interest rate of 11.0% and a default rate of 18.0%. The High Bench Loan is subject to monthly interest only payments with the remaining principal amount and any then unpaid interest due and payable on April 18, 2020. The High Bench Loan is subject to mandatory prepayment under certain circumstances, and is prepayable at our election at any time without penalty or premium. There are no financial covenants associated the High Bench Loan. At  December 31, 2018 , our outstanding balance on the High Bench Loan was  $3.1 million .
    
Letters of credit
 
At December 31, 2018 and 2017 , letters of credit totaling $280,000 and $355,000 , were issued on our behalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in the accompanying consolidated balance sheets.
 
Commercial purchasing card agreement
 
We have a commercial purchasing card (the "Purchasing Card") agreement. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At December 31, 2018 , $48,000 was outstanding and $952,000 was available under the Purchasing Card. At December 31, 2017 , $822,000 was outstanding and $4.2 million was available under the Purchasing Card.


67


Other Factors that May Affect Future Results

We periodically evaluate opportunities to repurchase our equity securities, obtain credit facilities, or issue additional debt or equity securities. In addition, we may, from time to time, consider the investment in, or acquisition of, complementary businesses, products, services, or technologies, any of which might affect our liquidity requirements or cause us to issue additional debt or equity securities. There can be no assurance that financing arrangements will be available in amounts or on terms acceptable to us, if at all. Our future results may be significantly different from our historical results for several other reasons as well, including the possibility discussed in this Annual Report on Form 10-K that we may sell our retail business, which would have a dramatic effect on our future results. Other reasons that our future results may be significantly different from our historical results include the potential effects on us of the accounting and tax changes discussed in this Annual Report on Form 10-K, and other reasons described in Item 1. "Business" under "Our Retail Business" and "Our Medici Business," as well as the risk factors described in Item 1A. "Risk Factors."

Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described in this Form 10-K, including the risks described in Item 1A of Part I, "Risk Factors", and all other information in this Form 10-K and in our other filings with the SEC including those we file after we file this Form 10-K, before deciding whether to purchase or hold our securities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business. The occurrence of any of the risks described under "Risk Factors" in this report could harm our business. The trading price of our securities could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.

Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

Non-GAAP Financial Measures

Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations regulate the disclosure of certain non-GAAP financial information.

Free cash flow
 
Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile below to "Net cash provided by (used in) operating activities," the nearest GAAP financial measure, is net cash provided by (used in) operating activities reduced by "Expenditures for fixed assets, including internal-use software and website development." We believe that net cash provided by (used in) operating activities is an important measure, since it includes both the cash impact of the continuing operations of the business and changes in the balance sheet that impact cash. We believe free cash flow is a useful measure to evaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we have available for mandatory debt service and financing obligations, changes in our capital structure, and future investments after purchases of fixed assets. Free cash flow measures have limitations as they omit certain components of the overall consolidated statement of cash flows and do not represent the residual cash flow available for discretionary expenditures. Free cash flow should not be considered a substitute for net income or cash flow data prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as reconciled below (in thousands):
 
 
Year ended
 December 31,
 
 
2018
 
2017
 
2016
Net cash provided by (used in) operating activities
 
$
(138,934
)
 
$
(35,221
)
 
$
39,564

Expenditures for fixed assets, including internal-use software and website development
 
(28,680
)
 
(23,586
)
 
(72,281
)
Free cash flow
 
$
(167,614
)
 
$
(58,807
)
 
$
(32,717
)


68


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments consist of cash and cash equivalents, trade accounts and contracts receivable, accounts payable and long-term obligations. We consider highly-liquid instruments with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. We currently do not hold any derivative financial instruments or foreign exchange contracts.

Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. However, the fair values of our investments may be subject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions.

At December 31, 2018 , we had $141.5 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $1.4 million on our earnings or loss, or the cash flows of these instruments.

At December 31, 2018 , letters of credit totaling $280,000 were outstanding under collateralized compensating cash balances held at our bank. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $3,000 on our earnings or loss if the letters of credit were fully drawn.

At December 31, 2018 , we had cryptocurrency-denominated assets totaling $2.4 million . Hypothetically, an increase or decrease in the market value of one hundred basis points would have an estimated impact of $24,000 on our earnings or loss, or the recorded value of these instruments. It is generally not our policy to hold material amounts of cryptocurrency because of volatility and market risk.

At December 31, 2018 , our recorded value in equity investments in public and private companies was $60.4 million . Our equity investments in publicly traded companies represent $2.6 million of our equity investments as of  December 31, 2018 , and are recorded at fair value, which is subject to market price volatility. We perform a qualitative assessment for our equity investments in private companies to identify impairment. If this assessment indicates that an impairment exists, we estimate the fair value of the investment and, if the fair value is less than carrying value, we write down the investment to fair value. Our assessment includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. Valuations of private companies are inherently more complex due to the lack of readily available market data. As such, we believe that market sensitivities are not practicable.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Annual Report on Form 10-K.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A.    CONTROLS AND PROCEDURES
(a)   Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

69


Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Exchange Act under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
(b)   Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has concluded that, as of December 31, 2018, our internal control over financial reporting was effective.

Our internal control over financial reporting is designed to provide reasonable assurance of achieving its objectives as specified above. Management does not expect, however, that our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is in Item 9A(c).

70


(c)   Independent Registered Public Accounting Firm's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Overstock.com, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Overstock.com, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017 , the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2018 , and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated March 18, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
    
/s/ KPMG LLP
Salt Lake City, Utah
March 18, 2019

71


(d)   Changes in Internal Control Over Financial Reporting
    
During the fiscal quarter ended December 31, 2018 , there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION
None.

72


PART III
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I under "Business—Executive Officers of the Registrant." Information required by Item 10 of Part III regarding our Board of Directors and any material changes to the process by which security holders may recommend nominees to the Board of Directors will be included in our definitive proxy statement for our 2019 annual meeting of stockholders, and is incorporated herein by reference. Information relating to compliance with Section 16(a) of the 1934 Act will be set forth in our definitive proxy statement for our 2019 annual meeting of stockholders and is incorporated herein by reference.

We have adopted a Code of Business Conduct and Ethics ("Code"), which applies to all employees of the Company, including our principal executive officer, principal financial officer, and principal accounting officer. We intend to disclose any amendments to the Code and any waivers granted to our principal executive officer, principal financial officer or principal accounting officer or other persons to the extent required by applicable rules or regulations in the Investor Relations section of our Website, www.overstock.com. We will provide a copy of the Code to any person without any charge upon request in writing addressed to Overstock.com. Attn: Investor Relations, 799 West Coliseum Way, Midvale, UT 84047.

ITEM 11.    EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our definitive proxy statement for the 2019 annual meeting of stockholders.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except as set forth herein, the information required by this Item is incorporated by reference to our definitive proxy statement for the 2019 annual meeting of stockholders.
The following graph compares the total cumulative stockholder return, on our common stock with the total cumulative return of the NASDAQ Market Index—U.S. ("NASDAQ Market Index") and the Morningstar Specialty Retail Index ("Morningstar Group Index") during the period commencing on January 1, 2014 through December 31, 2018 . The graph assumes a $100 investment at the beginning of the period in our common stock, the NASDAQ Market Index and the Morningstar Group Index, and the reinvestment of any dividends. Historic stock price performance is not necessarily indicative of future stock price performance.

73


COMPARISON OF YEAR CUMULATIVE TOTAL RETURN
OSTK-201612_CHARTX18631A04.JPG

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to our definitive proxy statement for the 2019 annual meeting of stockholders.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to our definitive proxy statement for the 2019 annual meeting of stockholders.

74


PART IV
ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1.     Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 

2.     Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts listed in (1) above is included herein. Schedules other than those listed above have been omitted as they are either not required, not applicable, or the information has otherwise been shown in the consolidated financial statements or notes thereto.

3. Exhibits

Exhibit Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
 
Filed Herewith
2.1 (b)
 
 
10-Q
 
000-49799
 
2.1
 
November 9, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.2 (b)
 
 
10-Q
 
000-49799
 
2.2
 
November 9, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.3 (b)
 
 
10-Q
 
000-49799
 
2.3
 
November 9, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.4 (b)
 
 
10-Q
 
000-49799
 
2.4
 
November 9, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1
 
 
10-Q
 
000-49799
 
3.1
 
July 29, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2
 
 
10-Q
 
000-49799
 
3.1
 
May 4, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

75


Exhibit Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
 
Filed Herewith
3.3
 
 
8-K
 
000-49799
 
3.1
 
December 15, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.4
 
 
8-K
 
000-49799
 
3.2
 
December 15, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1
 
 
S-1/A
 
333-83728
 
4.1
 
May 6, 2002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.2
 
 
8-K
 
000-49799
 
4.2
 
November 14, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.3 (a)
 
 
8-K
 
000-49799
 
4.1
 
December 15, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.4
 
Form of Participating Affiliate Agreement (included in Exhibit 4.3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.5 (a)
 
 
10-Q
 
000-49799
 
4.2
 
May 4, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.6 (a)
 
 
10-Q
 
000-49799
 
4.1
 
August 3, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.7
 
Certificate of Designation for Blockchain Voting Series A Preferred Stock (see Exhibit 3.3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.8
 
Certificate of Designation for Voting Series B Preferred Stock (see Exhibit 3.4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.9
 
Form of Warrant issued to Passport Special Opportunities Master Fund, L.P. dated November 8, 2017 (included in Exhibit 10.20)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.10
 
 
8-K/A
 
000-49799
 
4.1.2
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.11
 
Form of Warrant issued to Quantum Partners LP dated November 8, 2017 (included in Exhibit 10.21)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

76


Exhibit Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
 
Filed Herewith
4.12
 
 
8-K/A
 
000-49799
 
4.2.2
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1 (a)
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2 (a)
 
 
8-K
 
000-49799
 
10.1
 
May 15, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3 (a)
 
 
10-K
 
000-49799
 
10.12
 
February 21, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4
 
 
8-K
 
000-49799
 
10.1
 
May 7, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5
 
 
8-K
 
000-49799
 
10.1
 
August 6, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.6
 
 
8-K
 
000-49799
 
10.1
 
September 8, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.7
 
 
8-K
 
000-49799
 
10.2
 
May 7, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.8
 
 
8-K
 
000-49799
 
10.1
 
September 23, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.9
 
 
8-K
 
000-49799
 
10.1
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.10
 
 
8-K
 
000-49799
 
10.2
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

77


Exhibit Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
 
Filed Herewith
10.11
 
 
8-K
 
000-49799
 
10.3
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.12
 
 
8-K
 
000-49799
 
10.4
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.13
 
 
8-K
 
000-49799
 
10.5
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.14
 
 
8-K
 
000-49799
 
10.6
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.15 (a)
 
 
8-K
 
000-49799
 
10.1
 
August 1, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.16 (a)
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.17
 
 
8-K
 
000-49799
 
10.19
 
October 28, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.18
 
 
8-K
 
000-49799
 
10.1
 
November 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.19 (a)
 
 
8-K
 
000-49799
 
10.1
 
November 4, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.20
 
 
8-K
 
000-49799
 
10.1
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.21
 
 
8-K
 
000-49799
 
10.2
 
November 13, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.22 (a)
 
 
10-K
 
000-49799
 
10.24
 
March 15, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.23 (a)
 
 
8-K
 
000-49799
 
10.1
 
May 25, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.24 (a)
 
 
10-K
 
000-49799
 
10.25
 
March 15, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

78


Exhibit Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
 
Filed Herewith
10.25 (a)
 
 
10-Q
 
000-49799
 
10.2
 
August 9, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.26 (a)(b)(c)
 
 
8-K
 
000-49799
 
10.1
 
June 29, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.27 (a)
 
 
10-Q
 
000-49799
 
10.4
 
August 9, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.28 (a)
 
 
10-Q
 
000-49799
 
10.5
 
August 9, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.29
 
 
S-3
 
333-
226729
 
1.1
 
August 9, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.30
 
 
S-3
 
333-
226729
 
1.2
 
August 9, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.31 (a)
 
 
8-K
 
000-49799
 
10.1
 
September 26, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.32 (a)
 
 
8-K
 
000-49799
 
10.1
 
December 28, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.33 (a)
 
 
8-K
 
000-49799
 
10.1
 
February 9, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.34 (a)
 
 
8-K
 
000-49799
 
10.2
 
February 9, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

79


Exhibit Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
 
Filed Herewith
10.35 (a)
 
 
8-K
 
000-49799
 
10.1
 
April 4, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.36(a)
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.37(a)
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.38(a)
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
99.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
21
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
23
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
24
 
Powers of Attorney (see signature page)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 

80


Exhibit Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
 
Filed Herewith
101
 
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2018 and 2017; (ii) Consolidated Statements of Income for the years ended December 31, 2018, 2017, and 2016; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016; (iv) Consolidated Statements of Changes in Stockholder's Equity for the years ended December 31, 2018, 2017, and 2016; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016; and (vi) Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
__________________________________________
(a)
Management contract or compensatory plan or arrangement.
(b)
Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.
(c)
The representations and warranties of each of the parties contained in the Stock Purchase Agreement and the assertions embodied in those representations and warranties may not be accurate or complete because they are subject to a contractual standard of materiality different from those generally applicable to stockholders or were used for the purpose of allocating risk between the parties rather than establishing matters as facts. Accordingly, investors should not rely on the representations and warranties contained in the Stock Purchase Agreement as characterizations of the actual state of facts, or for any other purpose, at the time they were made or otherwise.

ITEM 16.    FORM 10-K SUMMARY
Not applicable.


81


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 18, 2019 .
 
 
OVERSTOCK.COM, INC.
 
 
By:
 
/s/ PATRICK M. BYRNE
 
 
 
 
Patrick M. Byrne
 
 
 
 
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Patrick M. Byrne and Gregory J. Iverson, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and conforming all that said attorney-in-fact, or his or their substitute or substitutes, may do or cause to be done by virtue hereof.
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ PATRICK M. BYRNE
 
Chief Executive Officer, President, and Director (Principal Executive Officer)
 
3/18/2019
Patrick M. Byrne

 
 
 
/s/ ALLISON H. ABRAHAM
 
Chairwoman of the Board
 
3/18/2019
Allison H. Abraham

 
 
 
/s/ GREGORY J. IVERSON
 
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
 
3/18/2019
Gregory J. Iverson

 
 
 
/s/ SAUM NOURSALEHI
 
Chief Executive Officer of tZERO Group, Inc. and Director
 
3/18/2019
Saum Noursalehi

 
 
 
/s/ JONATHAN E. JOHNSON III
 
President, Medici Ventures and Director
 
3/18/2019
Jonathan E. Johnson III

 
 
 
/s/ BARCLAY F. CORBUS
 
Director
 
3/18/2019
Barclay F. Corbus

 
 
 
/s/ KIRTHI KALYANAM
 
Director
 
3/18/2019
Kirthi Kalyanam

 
 
 
/s/ JOSEPH J. TABACCO, JR.
 
Director
 
3/18/2019
Joseph J. Tabacco, Jr.

 
 
 


82


Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Overstock.com, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Overstock.com, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017 , and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2018 , and the related notes and financial statement schedule II (collectively the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017 , and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018 , in conformity with U.S generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 18, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) .
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP
We have served as the Company's auditor since 2009.

Salt Lake City, Utah
March 18, 2019


83


Overstock.com, Inc.
Consolidated Balance Sheets
(in thousands)
 
December 31,
2018
 
December 31,
2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
141,512

 
$
203,215

Restricted cash
1,302

 
455

Accounts receivable, net
35,930

 
30,080

Inventories, net
14,108

 
13,703

Prepaids and other current assets
22,415

 
17,744

Total current assets
215,267

 
265,197

Fixed assets, net
134,687

 
129,343

Deferred tax assets, net
109

 

Intangible assets, net
13,370

 
7,337

Goodwill
22,895

 
14,698

Equity investments
60,427

 
13,024

Other long-term assets, net
14,464

 
4,216

Total assets
$
461,219

 
$
433,815

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
102,574

 
$
85,406

Accrued liabilities
87,858

 
82,611

Deferred revenue
50,578

 
46,468

Other current liabilities, net
476

 
178

Total current liabilities
241,486

 
214,663

Long-term debt, net
3,069

 

Long-term debt, net - related party

 
39,909

Other long-term liabilities
5,958

 
7,120

Total liabilities
250,513

 
261,692

Commitments and contingencies (Note 12)
 
 
 
Stockholders' equity:
 

 
 

Preferred stock, $0.0001 par value, authorized shares - 5,000
 

 
 

Series A, issued and outstanding - 127 and 127

 

Series B, issued and outstanding - 355 and 555

 

Common stock, $0.0001 par value
 

 
 

Authorized shares -100,000
 

 
 

Issued shares - 35,346 and 30,632
 

 
 

Outstanding shares - 32,146 and 27,497
3

 
3

Additional paid-in capital
657,981

 
494,732

Accumulated deficit
(458,897
)
 
(254,692
)
Accumulated other comprehensive loss
(584
)
 
(599
)
Treasury stock:
 

 
 

Shares at cost - 3,200 and 3,135
(66,757
)
 
(63,816
)
Equity attributable to stockholders of Overstock.com, Inc.
131,746

 
175,628

Equity attributable to noncontrolling interests
78,960

 
(3,505
)
Total stockholders' equity
210,706

 
172,123

Total liabilities and stockholders' equity
$
461,219

 
$
433,815

 
See accompanying notes to consolidated financial statements.

84


Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
Year ended
 December 31,
 
2018
 
2017
 
2016
Revenue, net
 

 
 

 
 

Retail
$
1,800,187

 
$
1,728,104

 
$
1,784,782

Other
21,405

 
16,652

 
15,181

Total net revenue
1,821,592

 
1,744,756

 
1,799,963

Cost of goods sold
 

 
 

 
 

Retail(1)
1,452,195

 
1,392,558

 
1,458,411

Other
15,489

 
11,647

 
10,203

Total cost of goods sold
1,467,684

 
1,404,205

 
1,468,614

Gross profit
353,908

 
340,551

 
331,349

Operating expenses:
 

 
 

 
 

Sales and marketing(1)
274,479

 
180,589

 
147,896

Technology(1)
132,154

 
115,878

 
106,760

General and administrative(1)
164,481

 
90,718

 
89,298

Litigation settlement

 

 
(19,520
)
Total operating expenses
571,114

 
387,185

 
324,434

Operating income (loss)
(217,206
)
 
(46,634
)
 
6,915

Interest income
2,208

 
659

 
326

Interest expense
(1,468
)
 
(2,937
)
 
(877
)
Other income (loss), net
(3,488
)
 
1,178

 
14,181

Income (loss) before income taxes
(219,954
)
 
(47,734
)
 
20,545

Provision (benefit) for income taxes
(2,384
)
 
64,188

 
9,297

Consolidated net income (loss)
$
(217,570
)
 
$
(111,922
)
 
$
11,248

Less: Net loss attributable to noncontrolling interests
(11,500
)
 
(2,044
)
 
(1,274
)
Net income (loss) attributable to stockholders of Overstock.com, Inc.
$
(206,070
)
 
$
(109,878
)
 
$
12,522

Net income (loss) per common share—basic:
 

 
 

 
 

Net income (loss) attributable to common shares—basic
$
(6.83
)
 
$
(4.28
)
 
$
0.49

Weighted average common shares outstanding—basic
29,976

 
25,044

 
25,342

Net income (loss) per common share—diluted:
 

 
 

 
 

Net income (loss) attributable to common shares—diluted
$
(6.83
)
 
$
(4.28
)
 
$
0.49

Weighted average common shares outstanding—diluted
29,976

 
25,044

 
25,426

____________________________________________________________
(1) Includes stock-based compensation as follows (Note 15):
 

 
 

 
 

 Cost of goods sold — retail
$
201

 
$
183

 
$
266

 Sales and marketing
1,728

 
415

 
249

 Technology
2,066

 
649

 
777

 General and administrative
10,361

 
2,830

 
3,599

 Total
$
14,356

 
$
4,077

 
$
4,891


See accompanying notes to consolidated financial statements.

85


Overstock.com, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
 
 
Year ended
 December 31,
 
2018
 
2017
 
2016
Consolidated net income (loss)
$
(217,570
)
 
$
(111,922
)
 
$
11,248

Other comprehensive income (loss):
 
 
 
 
 
Unrealized gain (loss) on cash flow hedges, net of benefit (expense) for taxes of $0, $(689), and $(211)
15

 
941

 
(110
)
Other comprehensive income (loss)
15

 
941

 
(110
)
Comprehensive income (loss)
$
(217,555
)
 
$
(110,981
)
 
$
11,138

Less: Comprehensive loss attributable to noncontrolling interests
(11,500
)
 
(2,044
)
 
(1,274
)
Comprehensive income (loss) attributable to stockholders of Overstock.com, Inc.
$
(206,055
)
 
$
(108,937
)
 
$
12,412


See accompanying notes to consolidated financial statements.


86


Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share data)
 
Year ended
 December 31,
 
2018
 
2017
 
2016
Equity attributable to stockholders of Overstock.com, Inc.
 

 
 

 
 

Number of common shares issued
 
 
 
 
 
Balance at beginning of year
30,632

 
27,895

 
27,634

Common stock issued upon vesting of restricted stock
234

 
212

 
219

Common stock issued for asset purchase
147

 

 

Exercise of stock options

 
39

 
42

Exercise of stock warrants
1,250

 
2,472

 

Common stock sold through ATM offering
2,883

 

 

Other
200

 
14

 

Balance at end of year
35,346


30,632


27,895

Number of treasury stock shares
 
 
 
 
 
Balance at beginning of year
3,135

 
2,463

 
2,400

Tax withholding upon vesting of restricted stock
65

 
68

 
63

Purchases of treasury stock

 
604

 

Balance at end of year
3,200

 
3,135

 
2,463

Total number of outstanding shares
32,146

 
27,497

 
25,432

Common stock
$
3

 
$
3

 
$
3

Number of Series A preferred shares issued and outstanding
 
 
 
 
 
Balance at beginning of year
127

 
127

 

Rights offering

 

 
127

Balance at end of year
127

 
127

 
127

Number of Series B preferred shares issued and outstanding
 
 
 
 
 
Balance at beginning of year
555

 
569

 

Rights offering

 

 
569

Other
(200
)
 
(14
)
 

Balance at end of year
355

 
555

 
569

Preferred stock
$

 
$

 
$

Additional paid-in capital


 


 
 
Balance at beginning of year
$
494,732

 
$
383,348

 
$
370,047

Stock-based compensation to employees and directors
10,316

 
4,077

 
4,891

Common stock issued for asset purchase
4,430

 

 

Exercise of stock options

 
664

 
819

Exercise of stock warrants
50,562

 
100,000

 

Common stock sold through ATM offering, net
94,554

 

 

Issuance of stock warrants
26

 
6,462

 

Rights offering

 

 
7,591

Other
3,361

 
181

 

Balance at end of year
$
657,981


$
494,732


$
383,348

Accumulated deficit
 
 
 
 
 
Balance at beginning of year
$
(254,692
)
 
$
(153,898
)
 
$
(166,420
)
Cumulative effect of change in accounting principle
5,040

 
9,374

 

Net income (loss) attributable to stockholders of Overstock.com, Inc.
(206,070
)
 
(109,878
)
 
12,522

Declaration and payment of preferred dividends
(77
)
 
(109
)
 

Other
(3,098
)
 
(181
)
 

Balance at end of year
$
(458,897
)
 
$
(254,692
)
 
$
(153,898
)
Accumulated other comprehensive loss
 
 
 
 
 
Balance at beginning of year
$
(599
)
 
$
(1,540
)
 
$
(1,430
)
Net other comprehensive income (loss)
15

 
941

 
(110
)
Balance at end of year
$
(584
)
 
$
(599
)
 
$
(1,540
)
Treasury stock
 
 
 
 
 
Balance at beginning of year
$
(63,816
)
 
$
(52,587
)
 
$
(51,747
)
Tax withholding upon vesting of restricted stock
(2,941
)
 
(1,229
)
 
(840
)
Purchases of treasury stock

 
(10,000
)
 

Balance at end of year
(66,757
)
 
(63,816
)
 
(52,587
)
Total equity attributable to stockholders of Overstock.com, Inc.
$
131,746

 
$
175,628

 
$
175,326

Continued on the following page

87





Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share data)
 
Year ended
 December 31,
 
2018
 
2017
 
2016
Total equity attributable to stockholders of Overstock.com, Inc.
$
131,746

 
$
175,628

 
$
175,326

 
 
 
 
 
 
Equity attributable to noncontrolling interests
 
 
 
 
 
Balance at beginning of year
$
(3,505
)
 
$
(2,366
)
 
$
(1,092
)
Proceeds from security token offering, net
82,354

 
905

 

Stock-based compensation to employees and directors
4,040

 

 

Tax withholding upon vesting of restricted stock
(1,681
)
 

 

Paid in capital for noncontrolling interest
5,932

 

 

Fair value of noncontrolling interest at acquisition
4,468

 

 

Net loss attributable to noncontrolling interests
(11,500
)
 
(2,044
)
 
(1,274
)
Other
(1,148
)
 

 

Total equity attributable to noncontrolling interests
$
78,960

 
$
(3,505
)
 
$
(2,366
)
 
 
 
 
 
 
Total stockholders' equity
$
210,706

 
$
172,123

 
$
172,960


See accompanying notes to consolidated financial statements.

88


Overstock.com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
Year ended December 31,
 
2018
 
2017
 
2016
Cash flows from operating activities:
 

 
 

 
 

Consolidated net income (loss)
$
(217,570
)
 
$
(111,922
)
 
$
11,248

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

 
 

Depreciation of fixed assets
26,411

 
28,848

 
27,283

Amortization of intangible assets
5,286

 
3,999

 
3,968

Stock-based compensation to employees and directors
14,356

 
4,077

 
4,891

Deferred income taxes, net
(2,386
)
 
65,199

 
7,719

Gain on investment in precious metals

 
(1,971
)
 
(201
)
Gain on sale of cryptocurrencies
(8,370
)
 
(1,995
)
 

Impairment of cryptocurrencies
10,463

 

 

Loss on equity investments, net
2,828

 
5,995

 
2,850

Loss on disposal of business and other asset abandonments
3,565

 

 

Impairment on indefinite-lived intangible assets
6,000

 

 

Early extinguishment costs of long-term debts
283

 
2,464

 

Other
711

 
368

 
356

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

 
 

Accounts receivable, net
(5,558
)
 
(1,938
)
 
(10,006
)
Inventories, net
628

 
5,234

 
1,105

Prepaids and other current assets
(3,622
)
 
(2,799
)
 
1,588

Other long-term assets, net
(2,870
)
 
(2,307
)
 
(786
)
Accounts payable
16,499

 
(20,995
)
 
(18,823
)
Accrued liabilities
5,661

 
(12,311
)
 
16,936

Deferred revenue
9,150

 
4,688

 
(9,164
)
Other long-term liabilities
(399
)
 
145

 
600

Net cash provided by (used in) operating activities
(138,934
)
 
(35,221
)
 
39,564

Cash flows from investing activities:
 

 
 

 
 

Proceeds from sale of precious metals

 
11,917

 
1,610

Investment in precious metals

 

 
(1,633
)
Purchase of intangible assets
(9,597
)
 
(423
)
 

Investment in equity securities
(48,731
)
 
(5,188
)
 
(4,750
)
Disbursement of note receivable
(3,059
)
 
(750
)
 
(3,668
)
Acquisitions of businesses, net of cash acquired
(12,912
)
 

 
1,248

Deposit on purchase of a business
(8,000
)
 

 

Expenditures for fixed assets, including internal-use software and website development
(28,680
)
 
(23,586
)
 
(72,281
)
Other
56

 
70

 
27

Net cash used in investing activities
(110,923
)
 
(17,960
)
 
(79,447
)
Cash flows from financing activities:
 

 
 

 
 

Payments on capital lease obligations
(496
)
 
(83
)
 

Paydown on direct financing arrangement

 

 
(54
)
Payments on finance obligations

 
(15,316
)
 
(1,906
)
Payments on interest swap

 
(1,535
)
 
(563
)
Proceeds from finance obligations

 

 
11,399

Payments on long-term debt
(40,000
)
 
(45,766
)
 

Proceeds from long-term debt

 
40,000

 
36,273

Payments of preferred dividends
(77
)
 
(109
)
 

Proceeds from issuance and exercise of stock warrants
50,588

 
106,462

 

Proceeds from exercise of stock options

 
664

 
819

Proceeds from rights offering, net of offering costs

 

 
7,591

Proceeds from security token offering, net of offering costs and withdrawals
82,354

 
905

 

Proceeds from sale of common stock, net of offering costs
94,554

 

 

Paid in capital for noncontrolling interest
6,700

 

 

Purchase of treasury stock

 
(10,000
)
 

Payments of taxes withheld upon vesting of restricted stock
(4,622
)
 
(1,229
)
 
(840
)
Payment of debt issuance costs

 
(670
)
 

Net cash provided by financing activities
189,001

 
73,323

 
52,719

Net increase (decrease) in cash and cash equivalents
(60,856
)
 
20,142

 
12,836

Cash, cash equivalents and restricted cash, beginning of year
203,670

 
183,528

 
170,692

Cash, cash equivalents and restricted cash, end of year
$
142,814

 
$
203,670

 
$
183,528


Continued on the following page


Overstock.com, Inc.
Consolidated Statements of Cash Flows
(Continued)
(in thousands)
 
Year ended December 31,
 
2018
 
2017
 
2016
Supplemental disclosures of cash flow information:
 

 
 

 
 

Cash paid during the period:
 

 
 

 
 

Interest paid, net of amounts capitalized
$
1,319

 
$
2,940

 
$
1,269

Income taxes paid (refunded), net
(726
)
 
487

 
1,338

Non-cash investing and financing activities:
 

 
 

 
 

Fixed assets, including internal-use software and website development costs, financed through accounts payable and accrued liabilities
$
139

 
$
989

 
$
2,219

Equipment acquired under capital lease obligations

 
1,421

 

Capitalized interest cost

 

 
105

Acquisition of assets through stock issuance
4,430

 

 

Change in fair value of cash flow hedge

 
(1,738
)
 
(659
)
Note receivable converted to equity investment
200

 
1,368

 
2,850


  See accompanying notes to consolidated financial statements.

89


Overstock.com, Inc.
Notes to Consolidated Financial Statements

1. BASIS OF PRESENTATION

Business and organization

As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise. We were formed on May 5, 1997 as D2-Discounts Direct, a limited liability company. On December 30, 1998, we were reorganized as a C Corporation in the State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, we changed our name to Overstock.com, Inc.

We are an online retailer and advancer of blockchain technology. Through our online retail business, we offer a broad range of price-competitive products, including furniture, home decor, bedding and bath, and housewares, among other products. We sell our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the technology, equipment, and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites.

In late 2014, we began working on initiatives to develop and advance blockchain technology, which initiatives we refer to collectively as Medici. Our Medici business initiatives seek to leverage the security, transparency and immutability of cryptographically protected and distributed ledgers, such as blockchains, and are focused on solving important problems, including financial transaction issues, particularly in the area of securities settlement. Our Medici business initiatives include our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), which conducts a majority of its business through its majority-owned subsidiary tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. Medici Ventures currently holds equity interests in several technology companies whose focuses include commercial blockchain applications for identity and social media, property and land, money and banking, capital markets, supply chain, and voting.

In December 2017 we engaged Guggenheim Securities, LLC to help us identify and evaluate certain strategic initiatives. We are considering a range of potential transactions, including a sale of our retail business and additional equity or debt financings. Our Board continually discusses a variety of potential strategic and financial options and other changes to our business, but has not approved or made any determination to consummate any strategic transaction, and may choose not to do so in the foreseeable future or at all.

Basis of presentation

We have prepared the accompanying consolidated financial statements pursuant to generally accepted accounting principles in the United States ("GAAP"). Preparing financial statements requires us to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, our actual results may be different from our estimates. The results of operations presented herein are not necessarily indicative of our results for any future period.

In the fourth quarter of 2018, we completed our annual review of our segment reporting and in light of a strategic shift in our Chief Operating Decision Maker's long-term strategic focus for our organization, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, revenues and cost of goods sold recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of operations. "Retail" includes retail revenue and costs of goods sold from both "Direct" and "Partner" transactions. Our revenues and costs of goods sold related to our Medici business remains in "Other". In addition, we have recast the prior period revenues and cost of goods sold to conform with current year presentation. Direct and Partner are no longer considered separate reportable segments in our Business Segment disclosures. In addition, tZERO has been identified as a reportable segment separate from Other.

For purposes of comparability, we reclassified other certain immaterial amounts in the prior periods presented to conform with the current year presentation. We also retrospectively applied certain accounting standard updates as discussed in Note 2—Accounting Policies,  Recently adopted accounting standards .


90



2. ACCOUNTING POLICIES
 
Principles of consolidation
 
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and subsidiaries for which we exercise control. All intercompany account balances and transactions have been eliminated in consolidation. The financial results of Verify Investor, LLC have been included in our consolidated financial statements from the date of acquisition on February 12, 2018. The financial results of Mac Warehouse, LLC have been included in our consolidated financial statements from the date of acquisition on June 25, 2018.
 
Use of estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, receivables valuation, revenue recognition, Club O and gift card breakage, sales returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets and internally-developed software, goodwill valuation, intangible asset valuation, equity investment valuation, income taxes, stock-based compensation, performance-based compensation, self-funded health insurance liabilities, and contingencies. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, actual results could differ materially from these estimates.

Cash equivalents

We classify all highly liquid instruments, including instruments with a remaining maturity of three months or less at the time of purchase, as cash equivalents. Cash equivalents were $3.1 million and $25.5 million at December 31, 2018 and 2017 , respectively.
 
Restricted cash
 
We consider cash that is legally restricted and cash that is held as compensating balances for credit arrangements as restricted cash.
 
Fair value of financial instruments

We account for our assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the fair-value hierarchy below. This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

Level 1 —Quoted prices for identical instruments in active markets; 
Level 2 —Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 —Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Our assets and liabilities that are adjusted to fair value on a recurring basis are cash equivalents, certain equity securities, and deferred compensation liabilities, which fair values are determined using quoted market prices from daily exchange traded markets on the closing price as of the balance sheet date and are classified as Level 1. Our other financial instruments, including cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, finance obligations, and debt are carried at cost, which approximates their fair value. Certain assets, including long-lived assets, certain equity securities, goodwill, cryptocurrencies, and other intangible assets, are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments using fair value measurements with unobservable inputs (level 3), apart from cryptocurrencies which use quoted prices from various digital currency exchanges with active markets, in certain circumstances (e.g., when there is evidence of impairment).


91


The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as of December 31, 2018 and 2017 , as indicated (in thousands): 
 
Fair Value Measurements at December 31, 2018:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
3,135

 
$
3,135

 
$

 
$

Investment in equity securities, at fair value
2,636

 
2,636

 

 

Trading securities held in a "rabbi trust" (1)
84

 
84

 

 

Total assets
$
5,855

 
$
5,855

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Deferred compensation accrual "rabbi trust" (2)
$
85

 
$
85

 
$

 
$

Total liabilities
$
85

 
$
85

 
$

 
$

 
 
Fair Value Measurements at December 31, 2017:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
25,455

 
$
25,455

 
$

 
$

Trading securities held in a "rabbi trust" (1)
74

 
74

 

 

Total assets
$
25,529

 
$
25,529

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Deferred compensation accrual "rabbi trust" (2)
92

 
92

 

 

Total liabilities
$
92

 
$
92

 
$

 
$

 ___________________________________________
(1)
  — Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term assets, net in the consolidated balance sheets.
(2)
— Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets.

Accounts receivable, net
 
Accounts receivable consist primarily of carrier rebates, trade amounts due from customers in the United States, and uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest. From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We maintain an allowance for doubtful accounts receivable based upon our business customers' financial condition and payment history, and our historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $2.1 million and $1.3 million at December 31, 2018 and 2017 , respectively.
 
Concentration of credit risk
 
At December 31, 2018 and 2017 , one and two banks held the majority of our cash and cash equivalents. Our cash equivalents primarily consist of money market securities which are uninsured. We do not believe that, as a result of this concentration, we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.
 
Inventories, net
 
Inventories, net include merchandise purchased for resale which are accounted for using a standard costing system which approximates the first-in-first-out ("FIFO") method of accounting, and are valued at the lower of cost and net realizable value. Inventory valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, liquidations, and expected recoverable values of each disposition category.
 

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Prepaids and other current assets

Prepaids and other current assets represent expenses paid prior to receipt of the related goods or services, including advertising, license fees, maintenance, packaging, insurance, prepaid inventories, other miscellaneous costs, and cryptocurrency-denominated assets ("cryptocurrencies"). See  Cryptocurrencies  below.

Cryptocurrencies

We hold cryptocurrency-denominated assets ("cryptocurrencies") such as bitcoin and we include them in Prepaids and other current assets in our consolidated balance sheets. Our cryptocurrencies were $2.4 million and $1.5 million at December 31, 2018 and 2017 , respectively, and are recorded at cost less impairment.

We recognize impairment on these assets caused by decreases in market value, determined by taking quoted prices from various digital currency exchanges with active markets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See  Fair value of financial instruments  above. Such impairment in the value of our cryptocurrencies is recorded in General and administrative expense in our consolidated statements of operations. Impairments on cryptocurrencies were  $10.5 million  for the  year ended December 31, 2018 . There was  no  impairment on cryptocurrencies during the  years ended December 31, 2017 and 2016 .

Gains and losses realized upon sale of cryptocurrencies are also recorded in General and administrative expense in our consolidated statements of operations. We occasionally use our cryptocurrencies to purchase other cryptocurrencies. Gains and losses realized with these non-cash transactions are also recorded in General and administrative expense in our consolidated statements of operations. These non-cash transactions as well as gains (losses) from cryptocurrencies received through our tZERO security token offering are also presented as an adjustment to reconcile Consolidated net income (loss) to Net cash provided by (used in) operating activities in our consolidated statements of cash flows. Further, the proceeds from the sale of cryptocurrencies received through our tZERO security token offering are presented as a financing activity in our consolidated statements of cash flows due to its near immediate conversion into cash and its economic similarity to the receipt of cash proceeds under the tZERO security token offering. Realized gains on sale of cryptocurrencies were $8.4 million for the year ended December 31, 2018 . There were no realized gains (losses) on sale of cryptocurrencies for the years ended December 31, 2017 and 2016 .

Fixed assets, net
 
Fixed assets are recorded at cost and stated net of depreciation and amortization. Fixed assets are depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related capital lease, whichever is shorter, as follows:
 
Life
(years)
Building
40
Land improvements
20
Building machinery and equipment
15-20
Furniture and equipment
5-7
Computer hardware
3-4
Computer software, including internal-use software and website development
2-4
 
Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.

Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.
 
During the years ended December 31, 2018 , 2017 , and  2016 , we capitalized $19.3 million , $9.6 million , and $15.9 million , respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Depreciation of internal-use software and website development for the years ended December 31, 2018 2017 , and  2016 was $13.8 million , $15.9 million , and $17.1 million , respectively.


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Depreciation expense is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands): 
 
Year ended
 December 31,
 
2018
 
2017
 
2016
Cost of goods sold - retail
$
354

 
$
307

 
$
310

Technology
21,894

 
24,604

 
25,693

Sales and marketing

 

 
124

General and administrative
4,163

 
3,937

 
1,156

Total depreciation, including internal-use software and website development
$
26,411

 
$
28,848

 
$
27,283


Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in our consolidated statements of operations.

Equity investments under ASC 321

At December 31, 2018 , we held minority interests (less than 20%) in fourteen privately held entities, accounted for under ASC Topic 321,  Investments - Equity Securities  ("ASC 321"), which are included in Equity investments in our consolidated balance sheets. One of these equity investments, which had a carrying value of  $2.6 million  at  December 31, 2018 , is carried at fair value based on Level 1 inputs. See  Fair value of financial instruments  above. The remaining equity investments lack readily determinable fair values and therefore the investments are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar equity securities of the same issuer. Dividends received are reported in earnings if and when received. We review our investments individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the investment is less than its carrying value. If such events or circumstances have occurred, we estimate the fair value of the investment and recognize an impairment loss equal to the difference between the fair value of the investment and its carrying value. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by the investee's management including quantitative information such as lower valuations in recently completed or proposed financings. These inputs are classified as Level 3. Because several of our investees are in the early startup or development stages, these entities are subject to potential changes in cash flows, valuation, and inability to attract new investors which may be necessary for the liquidity needed to support their operations.

The carrying amount of our investments under ASC 321 was approximately $20.3 million and $6.5 million at December 31, 2018 and 2017 , respectively. We recognized unrealized gains of  $1.1 million  during the year ended December 31, 2018 and no  unrealized gains on investments carried at fair value during the years ended  December 31, 2017  and  2016 , respectively. We recognized $511,000 , $5.5 million and $2.9 million impairment loss on these investments during the years ended December 31, 2018 , 2017 and 2016 , respectively. Unrealized gains and impairment losses on our investments are recorded in Other income (expense), net on our consolidated statements of operations.

Equity method investments under ASC 323

At December 31, 2018 , we held minority interests in privately held entities, accounted for as equity method investments under ASC Topic 323,  Investments - Equity Method and Joint Ventures  ("ASC 323"), which are included in Equity investments in our consolidated balance sheets. We can exercise significant influence, but not control, over the investees through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of directors.


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The following table includes our equity method investments and related ownership interest as of December 31, 2018 :
 
Ownership
interest
Bitt Inc.
21%
Spera, Inc.
19%
Voatz, Inc.
13%
SettleMint NV
30%
Bitsy, Inc.
33%
Chainstone Labs, Inc.
29%
Minds, Inc.
24%
VinX Network Ltd.
21%
GrainChain, Inc.
10%
StockCross Financial Services, Inc.
24%
Boston Security Token Exchange LLC
50%

Based on the nature of our ownership interests and the extent of our contributed capital, we have variable interests in certain of these entities. However, we have insufficient voting rights or other means to influence the investee such that we do not have power to direct the investee's activities that most significantly impact the economic performance of each entity. Further, we are not the investee's primary beneficiary and we therefore do not consolidate the investee in our financial statements. Our investments, plus any loans, off-balance sheet commitments, and other subordinated financial support related to these variable interest entities totaled $25.9 million and $3.7 million as of December 31, 2018 and 2017, respectively, representing our maximum exposures to loss.

The carrying amount of our equity method investments was approximately $40.1 million and $6.5 million at December 31, 2018 and 2017 , respectively. The carrying value of our equity method investments exceeded the amount of the underlying equity in net assets of the investees and the difference was primarily related to goodwill and the fair value of intangible assets. The basis difference attributable to amortizable intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss of the investee and the amortization of the basis difference related to intangible assets in Other income (expense), net in our consolidated statements of operations with corresponding adjustments to the carrying value of the investment. Our proportionate share of the net losses of our equity method investees and amortization of the basis difference for the years ended December 31, 2018 , 2017 and 2016  was $3.9 million , $0.5 million , and zero , respectively, and recognized in Other income (expense), net in our consolidated statements of operations.
 
Noncontrolling interests

Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), conducts its primary business through its majority-owned subsidiary, tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., which includes a financial technology company, two related registered broker dealers, an accredited investor verification company, and certain strategic interests in other entities which support or align with tZERO's objectives and strategies. Medici Ventures, tZERO, and their respective consolidated subsidiaries are included in our consolidated financial statements. Intercompany transactions have been eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.

On December 18, 2017, tZERO launched an offering (the "security token offering") of the right to acquire tZERO Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). The security token offering closed on August 6, 2018, and on October 12, 2018 tZERO issued the tZERO Security Tokens in settlement of the SAFEs. tZERO Security Token holders have the right to, prior to distributing earnings to tZERO common shareholders, a noncumulative dividend equal to 10% of tZERO's consolidated Adjusted Gross Revenue (as defined by the security token offering documents) for the most recently completed fiscal quarter , if declared by tZERO's Board of Directors, to be paid out of funds lawfully available on a quarterly basis. tZERO Security Token holders are not entitled to participate in any dividends paid to the holders of tZERO's common stock, have no rights to vote, and have no rights to the undistributed earnings of tZERO and are not entitled to any utility functionality as part of the tZERO Security Tokens. Any remaining undistributed earnings or losses of tZERO for a period shall be allocated to the noncontrolling interest held by the tZERO Security Token holders based on the contractual participation rights of the security to share in those earnings as if all the earnings for the period had been distributed. In the event of any liquidation, dissolution or winding up of tZERO, the tZERO Security Token holders will be entitled to the limited preferential liquidation rights equal to USD $0.10 per token to the extent funds are available .

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At  December 31, 2018 , cumulative proceeds since December 18, 2017, net of withdrawals, from the security token offering totaling $104.8 million have been classified as a component of noncontrolling interest within our consolidated financial statements. Withdrawals during the security token offering period were $22.0 million . As of  December 31, 2018 , tZERO incurred  $21.5 million  of offering costs associated with the security token offering that are classified as a reduction in proceeds within noncontrolling interest of our consolidated financial statements.

During the first quarter of 2018, tZERO purchased  65.8%  of ES Capital Advisors, LLC ("ES Capital"), a registered investment advisor under the Investment Advisers Act of 1940, which was accounted for as an asset acquisition. tZERO operated the ES Capital business under the name tZERO Advisors and offered automated investment advisory services on our Website. tZERO subsequently sold its equity interest in ES Capital during the fourth quarter of 2018.

tZERO also purchased  81.0%  of Verify Investor, LLC, an accredited investor verification company. This transaction is described further in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. The financial position and results of operations for these entities are included in our consolidated financial statements.

Medici Land Governance Inc., a Delaware public benefit corporation ("MLG"), was recently formed by Medici Ventures with our President and Chief Executive Officer, Dr. Patrick M. Byrne ("Dr. Byrne"). Pursuant to the Subscription Agreements dated September 21, 2018, Medici Ventures contributed certain of its assets, including intellectual property relating to technologies regarding land governance and property rights, to MLG in exchange for  510,000  shares of MLG common stock and at the same time Dr. Byrne personally contributed  $6.7 million  in cash to MLG in exchange for  390,000  shares of MLG common stock. As a result of the transactions described above, Medici Ventures holds approximately  57%  of the outstanding capital stock of MLG, and Dr. Byrne holds approximately  43%  of the outstanding capital stock of MLG.

Leases

We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Additionally, tenant improvement allowances are amortized as a reduction in rent expense over the term of the lease. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the term of the lease at inception, without assuming renewal features, if any, are exercised.
 
Treasury stock
 
We account for treasury stock of our common shares under the cost method and include treasury stock as a component of stockholders' equity.

Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that it is more likely than not that its fair value is less than its carrying amount, we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to the excess of the carrying amount over the fair value of the reporting unit, not to exceed the carrying amount of the goodwill. There were no impairments to goodwill recorded during the years ended December 31, 2018 , 2017 and 2016 .

For the year ended December 31, 2018 , we recognized  $8.2 million  in goodwill related to two business acquisitions as described in Note 3-Acquisitions, Goodwill, and Acquired Intangible Assets.

Intangible assets other than goodwill

We capitalize and amortize intangible assets other than goodwill over their estimated useful lives unless such lives are indefinite. Intangible assets other than goodwill acquired separately from third-parties are capitalized at cost while such assets acquired as part of a business combination are capitalized at their acquisition-date fair value. Indefinite-lived intangible assets are tested for impairment annually or more frequently when events or circumstances indicate that the carrying value more likely than not exceeds its fair value. In addition, we routinely evaluate the remaining useful life of intangible assets not being

96


amortized to determine whether events or circumstances continue to support an indefinite useful life, including any legal, regulatory, contractual, competitive, economic, or other factors that may limit their useful lives. Definite lived intangible assets are amortized using the straight-line method of amortization over their useful lives, with the exception of certain intangibles (such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated method of amortization based on cash flows. These definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable as described below under Impairment of long-lived assets .

Intangible assets, net consist of the following (in thousands):
 
December 31,
 
2018
 
2017
Intangible assets subject to amortization, gross (1)
$
29,099

 
$
17,779

Less: accumulated amortization of intangible assets subject to amortization
(15,729
)
 
(10,442
)
Total intangible assets, net
$
13,370

 
$
7,337

 ___________________________________________
(1)  — At December 31, 2018 , the weighted average remaining useful life for intangible assets, other, excluding fully amortized intangible assets, was 5.54 years.

For the year ended December 31, 2018 , we recognized a $3.2 million loss included in General and administrative expense in our consolidated statements of operation, upon the sale of our investment advisor licenses, as part of the ES Capital disposition, which were classified as intangible assets.

Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories in our consolidated statements of operations as follows (in thousands):
 
Year ended
 December 31,
 
2018
 
2017
 
2016
Technology
$
3,424

 
$
3,620

 
$
2,904

Sales and marketing
460

 
83

 
1,008

General and administrative
1,402

 
296

 
56

Total amortization
$
5,286

 
$
3,999

 
$
3,968


Estimated amortization expense for the next five years is: $5.6 million in 2019 , $2.8 million in 2020 , $2.4 million in 2021 , $1.2 million in 2022 , $705,000 in 2023 and $695,000 thereafter.

Impairment of long-lived assets
 
We review property and equipment and other long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. See the Cryptocurrencies section above for our impairment policy over cryptocurrencies. Recoverability is measured by comparison of the assets' carrying amount to future undiscounted net cash flows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments to long-lived assets recorded during the years ended December 31, 2018 , 2017 and 2016 .

For the year ended December 31, 2018 , we realized a $6.0 million loss on impairments to indefinite-lived intangible assets included in General and administrative expense in our consolidated statements of operations related to certain intellectual property licenses held by Medici Ventures that previously had an indefinite useful life. In conjunction with our annual assessment, we concluded the remaining useful life of these licenses were zero based on current contractual arrangements. There were no impairments to intangible assets recorded during the years ended December 31, 2017 and 2016 .

Other long-term assets, net

Other long-term assets, net consist primarily of long-term prepaid expenses and deposits.

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Derivative financial instruments
 
In 2014, we entered into a loan agreement in connection with the construction of our new corporate headquarters. We began borrowing under the facility in October 2015. Because amounts borrowed on the loan carried a variable LIBOR-based interest rate, we were affected by changes in certain market conditions and as such, we used derivatives, in the form of interest rate swap agreements, as a risk management tool to mitigate the potential impact of these changes. In November 2017, we repaid the outstanding balance of the underlying loans and concurrently terminated the derivative instruments.

To the extent that the hedges were effective, the changes in fair values of our cash flow hedges were recorded in Accumulated other comprehensive income (loss) in the consolidated statements of changes in stockholders' equity. The variable-rate interest on the borrowing for our new corporate headquarters was capitalized during the construction period and is reclassified into earnings over the depreciable life of the asset.

Upon termination of the derivative instrument in November 2017, we reclassified $941,000 unrealized loss on cash flow hedges, net of tax benefits from Accumulated other comprehensive loss into earnings, and recognized a $1.4 million loss on early extinguishment of debt recorded in Other income, net in our consolidated statements of operations for the year ended December 31, 2017 . The remaining construction period capitalized variable-rate interest from our cash flow hedge included in Accumulated other comprehensive loss is not material.

Revenue recognition
 
As further discussed below in Recently adopted accounting standards , the Company adopted ASC 606 effective at the beginning of fiscal 2018. Refer to Note 2 - Summary of Significant Accounting Policies of the Company’s annual report on Form 10-K for the year ended December 30, 2017 for policies in effect for revenue recognition prior to December 31, 2017, which were based on ASC 605.

Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services.  Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales and use taxes. Revenue recognition is evaluated through the following five-step process:
 
1) identification of the contract with a customer;
2) identification of the performance obligations in the contract;
3) determination of the transaction price;
4) allocation of the transaction price to the performance obligations in the contract; and
5) recognition of revenue when or as a performance obligation is satisfied.

Product Revenue
    
We derive our revenue primarily from our retail business through our Website, but may also derive revenue from sales of merchandise through offline and other channels. Our Retail revenue is derived primarily from merchandise sold at a point in time and shipped to customers. Merchandise sales are fulfilled with inventory sourced through our partners or from our owned inventory, depending on the most efficient means of fulfilling the customer contract. The majority of our sales, however, are fulfilled from inventory sourced through our partners.

Revenue is recognized when control of the product passes to the customer, typically at the date of delivery of the merchandise to the customer or the date a service is provided, and is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses, those warehouses we control, or those of our partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates.


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Generally, we require authorization from credit card or other payment vendors whose services we offer to our customers (such as PayPal), or verification of receipt of payment, before we ship products to consumers or business purchasers. From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). We generally receive payments from our customers before our payments to our suppliers are due. We do not recognize assets associated with costs to obtain or fulfill a contract with a customer.

Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the merchandise, and fees charged to customers are included in net revenue upon completion of our performance obligation. We present revenue net of sales taxes, discounts, and expected refunds.

Our merchandise sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns.  Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, we estimate a sales return liability for the variable consideration based on historical experience, which is recorded within Accrued liabilities in the consolidated balance sheet. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.

We evaluate the criteria outlined in ASC 606-10-55, Principal versus Agent Considerations , in determining whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned as commissions. When we are the principal in a transaction and control the specific good or service before it is transferred to the customer, revenue is recorded gross; otherwise, revenue is recorded on a net basis. Through contractual terms with our partners, we have the ability to control the promised goods or services and as a result record the majority of our retail revenue on a gross basis.

Our Other revenue occurs primarily through our broker dealer subsidiaries in our tZERO segment. We evaluate the revenue recognition criteria above for our broker dealer subsidiaries and we recognize revenue based on the gross amount of consideration that we expect to receive on securities transactions (commission revenue) on a trade date basis.

Club O loyalty program
 
We have a customer loyalty program called Club O Gold for which we sell annual memberships. For Club O Gold memberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period.

The Club O Gold loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on our Website. We also have a co-branded credit card program which provides Club O Gold members additional reward dollars for purchases made on our Website, and from other merchants. Under these programs, the customer may redeem Club O Reward dollars on future purchases made through our Website, which conveys a material right to the customer. As such, the initial transaction price giving rise to the reward dollar is allocated to each separate performance obligation based upon its relative standalone selling price. In determining the stand-alone selling price, we incorporate assumptions about the redemption rates of loyalty points. We recognize revenue for Club O Reward dollars when customers redeem such rewards as part of a purchase on our Website.

We record the standalone value of reward dollars earned in deferred revenue at the time the reward dollars are earned. Club O Reward dollars expire  90  days after the customer's Club O Gold membership expires. We recognize estimated reward dollar breakage, to which we expect to be entitled, over the expected redemption period in proportion to actual redemptions by customers. Upon adoption of Topic 606,  Revenue Contracts with Customers , on January 1, 2018, we began classifying the breakage income related to Club O Reward dollars and gift cards as a component of Retail revenue in our consolidated statements of operations rather than as a component of Other income (expense), net. Breakage included in revenue was  $5.6 million  for the  year ended December 31, 2018 . We also recognized a cumulative adjustment that reduced Accumulated deficit by approximately  $5.0 million  upon adoption related to the unredeemed portion of our gift cards and loyalty program rewards.

Our total deferred revenue related to the outstanding Club O Reward dollars was $6.9 million and $8.7 million at  December 31, 2018  and  December 31, 2017 , respectively. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.


99


Advertising Revenue

Advertising revenues are derived primarily from sponsored links and display advertisements that are placed on our Website, distributed via email, or sent out as direct mailers. Advertising revenue is recognized in Retail revenue when the advertising services are rendered. Advertising revenues were less than  2%  of total net revenues for all periods presented.

Revenue Disaggregation

Disaggregation of revenue by major product line is included in Segment Information in Note 21 - Business Segments.

Deferred Revenue

When the timing of our provision of goods or services is different from the timing of the payments made by our customers, we recognize a contract liability (customer payment precedes performance).

Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club O Gold membership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O Reward dollars earned from purchases as deferred revenue at the time they are earned based upon the relative standalone selling price of the Club O Reward dollar and we recognize it as Retail revenue in proportion to the estimated pattern of rights exercised by the customer. If reward dollars are not redeemed, we recognize Retail revenue upon expiration. In addition, we sell gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we recognize revenue from a gift card upon redemption of the gift card. For the unredeemed portion of our gift cards and loyalty program rewards, we will recognize Retail revenue over the expected redemption period based upon the estimated pattern of rights exercised by the customer.

The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the period (in thousands).

 
Amount
Deferred revenue at December 31, 2017
$
46,468

Increase due to deferral of revenue at period end
43,216

Decrease due to beginning contract liabilities recognized as revenue
(39,106
)
Deferred revenue at December 31, 2018
$
50,578


Sales returns allowance
 
We inspect returned items when they arrive at our processing facilities. We refund the full cost of the merchandise returned and all original shipping charges if the returned item is defective or we or our partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and actual return shipping fees.
 
Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.


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The following table provides additions to and deduction from the sales returns allowance (in thousands):
 
 
Amount
Allowance for returns at December 31, 2015
$
17,896

Additions to the allowance
163,693

Deductions from the allowance
(163,413
)
Allowance for returns at December 31, 2016
18,176

Additions to the allowance
169,398

Deductions from the allowance
(170,183
)
Allowance for returns at December 31, 2017
17,391

Additions to the allowance
174,864

Deductions from the allowance
(176,994
)
Allowance for returns at December 31, 2018
$
15,261


Cost of goods sold
 
Our Retail cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs, and credit card fees, and is recorded in the same period in which related revenues have been recorded. Our Other cost of goods sold primarily consists of exchange fees, clearing agent fees, and other exchange fees from our broker dealer subsidiaries in our tZERO segment. These fees are primarily for executing, processing, and settling trades on exchanges and other venues. These fees fluctuate based on changes in trade and share volumes, rate of clearance fees charged by clearing brokers, and exchanges.  
 
Year ended
 December 31,
 
2018
 
2017
 
2016
Total revenue, net
$
1,821,592

 
100%
 
$
1,744,756

 
100%
 
$
1,799,963

 
100%
Cost of goods sold
 

 
 
 
 

 
 
 
 

 
 
Product costs and other cost of goods sold
1,390,750

 
76%
 
1,328,749

 
76%
 
1,391,736

 
77%
Fulfillment and related costs
76,934

 
4%
 
75,456

 
4%
 
76,878

 
4%
Total cost of goods sold
1,467,684

 
81%
 
1,404,205

 
80%
 
1,468,614

 
82%
Gross profit
$
353,908

 
19%
 
$
340,551

 
20%
 
$
331,349

 
18%

  Advertising expense
 
We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to our Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in Sales and marketing expenses and totaled $249.7 million , $164.6 million and $135.1 million during the years ended December 31, 2018 , 2017 and 2016 , respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $961,000 and $987,000 at December 31, 2018 and 2017 , respectively.

Stock-based compensation
 
We measure compensation expense for all outstanding unvested share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards at the greater of a straight-line basis or on an accelerated schedule when vesting of the share-based awards exceeds a straight-line basis. When an award is forfeited prior to the vesting date, we recognize an adjustment for the previously recognized expense in the period of the forfeiture. See Note 15—Stock-Based Awards.


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Loss contingencies
 
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters when it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense legal fees as incurred (see Note 12—Commitments and Contingencies).
 
Income taxes
 
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including projected future taxable income, scheduled reversals of our deferred tax liabilities, tax planning strategies, and results of recent operations.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated income statements. Accrued interest and penalties are included within the related tax liability line in our consolidated balance sheets.

Net income (loss) per share

In 2016, we issued shares of our Blockchain Voting Series A Preferred Stock and our Voting Series B Preferred Stock (collectively the "preferred shares"). These shares are considered participating securities, and as a result, net income (loss) per share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate remaining net income (loss) attributable to our stockholders to both common shares and participating securities (based on the percentages outstanding) in determining net income (loss) per common share.

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shares (after allocating between common shares and participating securities) by the weighted average number of common shares outstanding during the period.

Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common shares (after allocating between common shares and participating securities) by the weighted average number of common and potential common shares outstanding during the period (after allocating total dilutive shares between our common shares outstanding and our preferred shares outstanding). Potential common shares, comprising incremental common shares issuable upon the exercise of stock options, warrants, and restricted stock awards are included in the calculation of diluted net income (loss) per common share to the extent such shares are dilutive. Net income (loss) attributable to common shares is adjusted for options and restricted stock awards issued by our subsidiaries when the effect of our subsidiary's diluted earnings per share is dilutive.


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The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data):
 
Year ended December 31,
 
2018
 
2017
 
2016
Net income (loss) attributable to stockholders of Overstock.com, Inc.
$
(206,070
)
 
$
(109,878
)
 
$
12,522

Less: Preferred stock converted to common stock
3,098

 

 

Less: Preferred stock dividends - declared and accumulated
77

 
216

 

Undistributed income (loss)
(209,245
)
 
(110,094
)
 
12,522

Less: Undistributed loss allocated to participating securities
(4,368
)
 
(2,960
)
 

Net income (loss) attributable to common shares
$
(204,877
)
 
$
(107,134
)
 
$
12,522

Net income (loss) per common share—basic:
 

 
 

 
 

Net income (loss) attributable to common shares—basic
$
(6.83
)
 
$
(4.28
)
 
$
0.49

Weighted average common shares outstanding—basic
29,976

 
25,044

 
25,342

Effect of dilutive securities:
 

 
 

 
 

Stock options and restricted stock awards

 

 
84

Weighted average common shares outstanding—diluted
29,976

 
25,044

 
25,426

Net income (loss) attributable to common shares—diluted
$
(6.83
)
 
$
(4.28
)
 
$
0.49

 
The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):
 
Year ended December 31,
 
2018
 
2017
 
2016
Stock options and restricted stock units
543

 
226

 
466

Common shares issuable under stock warrant
21

 
78

 


Warrants

On November 8, 2017, we issued warrants to purchase up to a combined aggregate of 3,722,188 shares of our common stock to two purchasers in privately negotiated transactions, for an aggregate purchase price of $6.5 million , net of issuance costs. The exercise price for the warrants was $40.45 per share of common stock. On December 29, 2017, one of the warrant holders exercised its warrant in full and purchased a total of 2,472,188 shares of common stock for $100.0 million . On January 17, 2018, the other warrant holder exercised its warrant in full and purchased 1,250,000 shares of common stock for $50.6 million .

Recently adopted accounting standards

In May 2014, the FASB issued ASU 2014-09,  Revenue from Contracts with Customers (Topic 606) , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. We adopted the new standard on January 1, 2018 with a cumulative adjustment that reduced Accumulated deficit by approximately  $5.0 million  as opposed to retrospectively adjusting prior periods. The adjustment primarily relates to the unredeemed portion of our gift cards and loyalty program rewards, which we will recognize over the expected redemption period, rather than waiting until the likelihood of redemption becomes remote or the rewards expire. We have also updated revenue disclosures in the notes to our financial statements as required under the new standard.

The implementation did not impact our gross and net recognition for our revenue transactions. In addition, we continue to recognize revenue related to merchandise sales upon delivery to our customers. However, we now present breakage on our Club O Rewards and gift cards in Retail revenue in our consolidated statement of operations rather as a component of Other income (expense), net.

In January 2016, the FASB issued ASU 2016-01,  Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , which requires equity investments previously recognized under the cost method to be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. We adopted the changes under the new standard

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on January 1, 2018 on a prospective basis. The implementation of ASU 2016-01 did not have a material impact on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18,  Statement of Cash Flows (Topic 230): Restricted Cash , which requires amounts generally described as restricted cash be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown in the statement of cash flows. We adopted the new standard on January 1, 2018 retrospectively to each period presented in the statement of cash flows. The implementation of ASU 2016-18 did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-01,  Business Combinations (Topic 805): Clarifying the Definition of a Business,  which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted the changes under the new standard on January 1, 2018 on a prospective basis. The implementation of ASU 2017-01 did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04,  Intangibles — Goodwill and Other (Topic 350) — Simplifying the Test for Goodwill Impairment . The ASU simplifies the quantitative goodwill impairment test by eliminating the second step of the test. Under this ASU, impairment will be measured by comparing the estimated fair value of the reporting unit with its carrying value. We early adopted this ASU in the fourth quarter of 2018. Adoption of the ASU did not have a material impact on the results of our goodwill impairment test.

Recently issued accounting standards
 
In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) , which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for us on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. We expect to elect the "package of practical expedients", which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs as well as the practical expedient pertaining to land easements. We do not expect to elect the use-of-hindsight practical expedient.

We expect that this standard will have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our warehouse, office, and equipment operating leases; and (2) providing significant new disclosures about our leasing activities.

On adoption, we currently expect to recognize additional operating liabilities which includes the present value of the total amount disclosed in "Note 12—Commitments and Contingencies", which constitute the remaining minimum rental payments under current leasing standards for our existing operating leases, discounted by our incremental borrowing rate for borrowings of a similar duration on a fully secured basis, with corresponding ROU assets of approximately the same amount.

The new standard also provides practical expedients for an entity's ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-

104


term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.

In June 2018, the FASB issued ASU 2018- 07,  Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting;  which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. The new standard becomes effective for us on January 1, 2019. We do not expect the adoption to have a material impact on our consolidated financial statements and related disclosures.


3. ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS

Verify Investor, LLC

On February 12, 2018, tZERO acquired  81%  of the total equity interests of Verify Investor, LLC, an accredited investor verification company, for a total purchase price of  $12.0 million  in cash. We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates and assumptions about the relative competitive environment.

The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):    
Purchase Price
Fair Value
Cash paid, net of cash acquired
$
11,769

Allocation
 
Intangible assets
$
7,400

Goodwill
7,360

Other assets acquired
3

Other liabilities assumed
(179
)
Total net assets, net of cash acquired
14,584

Less: noncontrolling interest
(2,815
)
Total net assets attributable to tZERO, net of cash acquired
$
11,769


The following table details the identifiable intangible assets acquired at their fair value and remaining useful lives as of December 31, 2018 (amounts in thousands): 
Intangible Assets
Fair Value
 
Weighted Average Useful Life (years)
Technology and developed software
$
6,300

 
10
Trade names
700

 
10
Customer relationships
400

 
0.5
Total acquired intangible assets as of the acquisition date
7,400

 
 
Less: accumulated amortization of acquired intangible assets
1,105

 
 
Total acquired intangible assets, net
$
6,295

 
 

The expense for amortizing intangible assets acquired in connection with this acquisition was $1.1 million for the year ended December 31, 2018 .

Acquired intangible assets primarily include technology, trade name, and customer relationships. As described above, we determined the fair value of these assets using an income approach method to determine the present value of expected future cash flows for each identifiable intangible asset. This method was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated based on the company's historical operating results.

The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the acquisition date. The goodwill recognized arises from intangible assets that do not qualify for separate recognition and expected

105


synergies with our tZERO operations. The total amount of goodwill expected to be deductible for tax purposes is our share of the goodwill recognized at the acquisition date. The carrying amount of goodwill has not changed since the acquisition date.

Pro forma results of operations have not been presented because the effects of this acquisition were not material to our consolidated results of operations.

Mac Warehouse, LLC

On June 25, 2018, we acquired  100%  of the total equity interests of Mac Warehouse, LLC, an electronics retailer of refurbished Apple products, to complement our retail business for a total purchase price of  $1.2 million  in cash and the assumption of a loan of $3.1 million . We estimated the fair value of the acquired assets and liabilities based on Level 3 inputs, which were unobservable (see Note 2-Accounting Policies,  Fair value of financial instruments ) .  These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates and assumptions about the relative competitive environment.

Determination and allocation of the purchase price to net tangible and intangible assets is based upon preliminary estimates. These preliminary estimates and assumptions could change significantly during the measurement period as we finalize the valuations of the intangible assets acquired and related tax impact. Any change could result in variances between our future financial results and the amounts recognized in the financial information presented below, including variances in fair values recorded, as well as expenses associated with these items.

The preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):
Purchase Price
Fair Value
Cash paid, net of cash acquired
$
1,143

Allocation
 
Accounts receivable, net
$
399

Inventories, net
1,033

Prepaids and other current assets
29

Fixed assets
154

Intangible assets
3,502

Goodwill
837

Accounts payable and accrued liabilities
(905
)
Long-term debt, net
(3,069
)
Deferred tax liabilities
(837
)
Total net assets, net of cash acquired
$
1,143


Acquired intangible assets primarily include trade name and customer relationships which have an estimated useful life of 18 months.

The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the acquisition dates. The carrying amount of goodwill includes the amount of deferred tax liability recognized.

The following unaudited pro forma financial information presents our results as if the current year acquisitions of Mac Warehouse, LLC had occurred at the beginning of 2016 (amounts in thousands), however, it should not be taken as indicative of our future consolidated results of operations:
(unaudited)
 
Years ended December 31,
 
 
2018
 
2017
 
2016
Total revenue
 
$
1,825,776

 
$
1,759,503

 
$
1,809,418

Consolidated net income (loss)
 
$
(222,597
)
 
$
(111,848
)
 
$
11,380



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4. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consist of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Freight rebates receivable
 
$
11,729

 
$
8,527

Accounts receivable, trade
 
10,380

 
8,317

Credit card receivables
 
8,924

 
8,480

Other receivables
 
7,013

 
6,009

 
 
38,046

 
31,333

Less: allowance for doubtful accounts
 
(2,116
)
 
(1,253
)
Accounts receivable, net
 
$
35,930

 
$
30,080



5. INVENTORIES, NET

Inventories, net consist of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Product inventories, net
 
$
10,520

 
$
8,844

Inventory in-transit
 
3,588

 
4,859

Total inventories, net
 
$
14,108

 
$
13,703



6. PREPAIDS AND OTHER CURRENT ASSETS

Prepaids and other current assets consist of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Prepaid maintenance
 
$
7,373

 
$
7,427

Prepaid other
 
7,573

 
5,684

Other current assets
 
3,322

 
1,577

Prepaid insurance
 
2,341

 
444

Prepaid advertising
 
961

 
987

Prepaid inventories
 
845

 
1,625

Total prepaids and other current assets
 
$
22,415

 
$
17,744



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7. FIXED ASSETS, NET

Fixed assets, net consist of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Computer hardware and software, including internal-use software and website development
 
$
215,412

 
$
196,501

Building
 
69,266

 
69,169

Furniture and equipment
 
17,066

 
14,455

Land
 
12,781

 
12,781

Building machinery and equipment
 
9,713

 
8,356

Leasehold improvements
 
8,379

 
7,752

Land improvements
 
6,972

 
6,764

 
 
339,589

 
315,778

Less: accumulated depreciation
 
(204,902
)
 
(186,435
)
Total fixed assets, net
 
$
134,687

 
$
129,343


Depreciation of fixed assets totaled $26.4 million , $28.8 million , and $27.3 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. During 2018 , we retired $8.0 million of fully depreciated fixed assets that were removed from service in 2018 .

Fixed assets included assets under capital leases and finance obligations of $1.8 million and $1.8 million at December 31, 2018 and 2017 , respectively. Accumulated depreciation related to assets under capital leases and finance obligations was $962,000 and $458,000 at December 31, 2018 and 2017 , respectively.

Depreciation expense of assets recorded under capital leases and finance obligations was $504,000 , $3.5 million and $4.1 million for the years ended December 31, 2018 , 2017 and 2016 , respectively.


8. OTHER LONG-TERM ASSETS, NET

Other long-term assets, net consist of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Deposit on purchase of a business
 
$
8,000

 
$

Other long-term assets
 
4,310

 
2,786

Prepaid expenses, long-term portion
 
2,154

 
1,430

Total other long-term assets, net
 
$
14,464

 
$
4,216



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9. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Accounts payable accruals
 
$
15,872

 
$
16,614

Allowance for returns
 
15,261

 
17,391

Accrued marketing expenses
 
14,150

 
25,959

Accrued compensation and other related costs
 
12,099

 
10,716

Accrued loss contingencies
 
10,940

 
608

Sales and other taxes payable
 
9,923

 
2,363

Accrued freight
 
5,343

 
5,040

Other accrued expenses
 
4,270

 
3,920

Total accrued liabilities
 
$
87,858

 
$
82,611



10. DEFERRED REVENUE

Deferred revenue consists of the following (in thousands):
 
 
December 31,
 
 
2018
 
2017
Payments received prior to product delivery
 
$
30,033

 
$
24,632

Club O membership fees and reward points
 
11,709

 
11,761

Unredeemed gift cards
 
3,399

 
4,955

In store credits
 
4,707

 
4,489

Other
 
730

 
631

Total deferred revenue
 
$
50,578

 
$
46,468



11. BORROWINGS
 
PCL L.L.C. Term Loan
    
On November 6, 2017, we entered into a loan agreement with PCL L.L.C., an entity directly or indirectly wholly-owned by the mother and brother of our President and Chief Executive Officer, Dr. Patrick M. Byrne ("Dr. Byrne"). The agreement provides for a  $40.0 million  term loan (the "PCL Loan") which carries an annual interest rate of  8.0% . On May 8, 2018, our Board of Directors approved a prepayment of the PCL Loan and we repaid the entire outstanding balance under the loan plus accrued interest.

High Bench Senior Credit Agreement

On June 25, 2018, we became party to a senior credit agreement, as amended, with High Bench-Mac Warehouse-Senior Debt, LLC ("High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the amended agreement, the loan carries an annual interest rate of  11.0%  and a default rate of  18.0% . The High Bench Loan is subject to monthly interest only payments with the remaining principal amount and any then unpaid interest due and payable on April 18, 2020. The High Bench Loan is subject to mandatory prepayment under certain circumstances, such as a change-in-control of the business, and is prepayable at our election at any time without penalty or premium. There are no financial covenants associated the High Bench Loan. At  December 31, 2018 , our outstanding balance on the High Bench Loan was  $3.1 million .


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Letters of credit
 
At December 31, 2018 and 2017 , letters of credit totaling $280,000 and $355,000 , respectively, were issued on our behalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in our consolidated balance sheets.
 
Commercial purchasing card agreement
 
We have a commercial purchasing card (the "Purchasing Card") agreement. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At December 31, 2018 , $48,000 was outstanding and $952,000 was available under the Purchasing Card. At December 31, 2017 , $822,000 was outstanding and $4.2 million was available under the Purchasing Card.

Capital lease

During the year ended December 31, 2017, we entered into a capital lease arrangement of computer equipment for  $1.4 million . The arrangement will expire in 2020. At December 31, 2018 , the outstanding balance under the capital lease was $884,000 and is included in Other current liabilities, net and Other long-term liabilities on our consolidated balance sheets. Future payment obligations, including interest, under the capital lease are $496,000 and $413,000 for 2019 and 2020 , respectively.


12. COMMITMENTS AND CONTINGENCIES

Summary of future minimum lease payments for all operating leases

Minimum future payments under all operating leases as of December 31, 2018 , are as follows (in thousands):
Payments due by period:
 
 
2019
 
$
8,822

2020
 
7,414

2021
 
7,654

2022
 
7,579

2023
 
6,677

Thereafter
 
19,571

 
 
$
57,717


Our subsidiary, tZERO, commenced a new lease subsequent to December 31, 2018 . We have included the future lease payments associated with this lease in the table above.

Rental expense for operating leases totaled $7.8 million , $9.3 million and $12.6 million for the years ended December 31, 2018 , 2017 and 2016 , respectively.

Legal proceedings and contingencies
 
From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property, claims under the securities laws, and other commercial matters related to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we have been in the past and we may be in the future subject to significant damages. In some instances, other parties may have contractual indemnification obligations to us. However, such contractual obligations may prove unenforceable or non-collectible, and if we cannot enforce or collect on indemnification obligations, we may bear the full responsibility for damages, fees and costs resulting from such litigation. We may also be subject to penalties and equitable remedies that could force us to alter important business practices. Such litigation could be costly and time consuming and could divert or distract our management and key personnel from our business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of such matters could materially affect our business, results of operations, financial position, or cash flows. The nature of the loss contingencies relating to claims that have been asserted against us are described below.
 

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On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District of California. We are alleged to have infringed a patent covering search and categorization software. We believe that certain third-party vendors of products and services sold to us are contractually obligated to indemnify us, and we have tendered defense of the case to an indemnitor who accepted the defense. On April 21, 2016, the court entered an order partially dismissing the claims against us. On May 4, 2016, the plaintiff filed an amended complaint, and we filed our answer. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.

On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, filed suit against us in the United States District Court in the Eastern District of Texas for infringement of patents covering products and services that verify the delivery and integrity of email messages. We tendered defense of the case to an indemnitor who accepted the defense. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.

On September 20, 2018, a jury returned a verdict against us in our Delaware unclaimed property case, which is expected to result in a judgment against us in the amount of approximately  $7.3 million  (for certain unredeemed gift card balances, treble damages, and penalties) plus attorneys’ fees and costs. Our estimated liability for these amounts was included in Accrued liabilities at December 31, 2018. The expense associated with these litigation charges was included in general and administrative expense in our consolidated statement of operations for the year ended December 31, 2018. William French ("French") and the State of Delaware ("Delaware") sued us, along with numerous other defendants, in the Superior Court of the State of Delaware for alleged violations of Delaware's unclaimed property laws. French and Delaware alleged that we knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. We intend to file an appeal once a judgment has been entered by the court.

On June 21, 2018, the U.S. Supreme Court issued an opinion in our South Dakota sales tax case, overturning  Quill Corp v. North Dakota  and permitting states to require remote sellers to collect sales tax under certain circumstances. As a result, we began collecting sales tax in all 45 states that have sales tax, including South Dakota. Pursuant to South Dakota’s statute, we are not required to pay sales tax retroactively. Although the U.S. Supreme Court’s opinion vacated and remanded the case back to the South Dakota Supreme Court for further proceedings, the parties entered an agreement to dismiss the case in November of 2018.

On July 7, 2017, the State of Wyoming sued us along with  five  other defendants in the Second Judicial District Court of Wyoming. Wyoming alleged that U.S. constitutional law should be revised to permit Wyoming to require out-of-state e-commerce retailers to collect and remit sales tax in Wyoming in accordance with Wyoming's sales tax statute. After the U.S. Supreme Court’s ruling in our South Dakota case listed above, we began collecting sales tax in Wyoming and a consent judgment to dismiss the case was entered in November of 2018. Wyoming’s statute does not require us to pay sales tax retroactively.

On August 28, 2017, the State of Indiana sued us along with  one  other defendant in the Superior Court of Indiana, Marion County. Indiana alleged that U.S. constitutional law should be revised to permit Indiana to require out-of-state e-commerce retailers to collect and remit sales tax in Indiana in accordance with Indiana's sales tax statute. After the U.S. Supreme Court’s ruling in our South Dakota case listed above, we began collecting sales tax in Indiana. Indiana’s statute does not require us to pay sales tax retroactively. The Indiana case was dismissed in August of 2018.

In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December of 2018, we received a follow-up request from the SEC relating to its investigation. We are cooperating fully with the SEC in connection with its investigation.

tZERO's broker-dealer subsidiaries are, and any broker-dealer subsidiaries that it acquires or forms in the future will be, subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute and PRO Securities is registered with the SEC as a broker-dealer under the Exchange Act and in the states in which it conducts securities business and is a member of FINRA and other SROs (as applicable). In addition, PRO Securities owns and operates the PRO Securities ATS, which is registered with the SEC as an alternative trading system. Each of SpeedRoute and PRO Securities is subject to regulation, examination, investigation, and disciplinary action by the SEC, FINRA, and state securities regulators, as well as other governmental authorities and SROs with which it is registered

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or licensed or of which it is a member. Moreover, as a result of tZERO's projects seeking to apply distributed ledger technologies to the capital markets, tZERO's subsidiaries have been, and remain involved in, ongoing oral and written communications with regulatory authorities. As previously disclosed, tZERO's broker-dealer subsidiaries are currently undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities; as appropriate or required, we will provide further information regarding such matters. Any failure by tZERO's broker-dealer subsidiaries to satisfy their regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us.

On January 31, 2019, a putative class action lawsuit was filed against us in the United States District Court, Southern District of New York, alleging that our website violates the Americans with Disabilities Act ("ADA") in addition to other New York specific laws, because it is not accessible to blind and visually impaired people. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action.

On March 15, 2019, Consolidated Transaction Processing, LLC. filed suit against us in the United States District Court for the District of Delaware. We are alleged to have infringed patents covering electronic transaction processing methods. We are currently evaluating the merits of the complaint, and no estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action and pursue any indemnification rights that exist with our vendors.

We establish liabilities when a particular contingency is probable and estimable. At December 31, 2018 , we have accrued $10.3 million , which is included in accrued liabilities in the consolidated balance sheets. It is reasonably possible that the actual losses may exceed our accrued liabilities.


13. INDEMNIFICATIONS AND GUARANTEES
 
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, the environmental indemnity we entered into in favor of the lenders under our prior loan agreements, customary indemnification arrangements in underwriting agreements and similar agreements, and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.


14. STOCKHOLDERS' EQUITY

Common Stock

Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends declared by the Board of Directors out of funds legally available, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid on our common stock through December 31, 2018 .

Preferred Stock

Each share of Series A Preferred and each share of Series B Preferred (collectively the "preferred shares") is intended to have voting and dividend rights similar to those of one share of common stock. Preferred shares rank senior to common stock with respect to dividends. Holders of the preferred shares will be entitled to an annual cash dividend of $0.16 per share, in preference to any dividend payment to the holders of the common stock, out of funds of the Company legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the preferred shares are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the common stock, subject to potentially different treatment if we effect a stock dividend, stock split or combination of the common stock. There are no arrearages in cumulative preferred dividends. We declared and paid a cash dividend of $0.16 per share on our preferred stock during 2017 and 2018 .

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Neither the Series A Preferred nor Series B Preferred is required to be converted into or exchanged for shares of our common stock or any other entity; however, at our sole discretion, we may convert the Series A Preferred shares into Series B Preferred shares at any time on a one -to-one basis. Until the third anniversary of the original issuance date, we may redeem, at our discretion, both the Series A and Series B Preferred shares for an amount equal to the highest of the following: (1) the subscription price plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a five -trading-day period and (3) 105% of the average trading price of the series of preferred shares during the same five -day-trading period. In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately, with each share of Series A Preferred and each share of Series B Preferred being treated as though it were a share of our common stock.

JonesTrading Sales Agreement

In August 2018, we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under which we conducted "at the market" public offerings of our common stock during the quarter ended September 30, 2018, and may conduct additional "at the market" public offerings of our common stock from time to time. Under the sales agreement, JonesTrading, acting as our agent, may offer our common stock in the market on a daily basis or otherwise as we request from time to time. We have no obligation to sell additional shares under the sales agreement, but expect to do so from time to time. We will pay JonesTrading up to a  2.0% sales commission on all sales. The sales agreement contemplates sales of up to  $150 million  of our common stock over a period of up to  three  years. As of December 31, 2018 , we had sold  2,883,344  shares of our common stock pursuant to the sales agreement and have received  $94.6 million  in proceeds, net of  $2.6 million  of offering costs, including commissions paid to JonesTrading. The average price per share of stock sold pursuant to the sales agreement during the year ended December 31, 2018 , excluding offering costs, was  $33.71 .

JonesTrading Standby Equity Agreement

In August 2018 we also entered into a standby equity underwriting agreement with JonesTrading. We did not sell any shares under the standby equity underwriting agreement, and the agreement terminated in accordance with its terms during the quarter ended September 30, 2018. Under the standby underwriting agreement, we had the right, but no obligation, to sell up to  $50 million  of our common stock to JonesTrading, as underwriter, for sale to the public in a firm commitment public offering. We paid a  1%  commitment fee to JonesTrading for entering into the underwriting agreement.

GSR Agreement

In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). The Token Purchase Agreement sets forth the terms on which GSR agreed to purchase, for  $30 million , on May 6, 2019 or such other date as may be agreed by the parties, security tokens at a price of  $6.67  per security token. These security tokens were issued by tZERO to Overstock in satisfaction of  $30 million  of tZERO's indebtedness to Overstock. We may be required to obtain additional tokens in order to fulfill our obligations under the agreement. The agreement states that the obligations of GSR to complete the transaction described will be subject to conditions, some of which are unidentified.


15. STOCK BASED AWARDS

We have equity incentive plans that provide for the grant to employees and board members of stock-based awards, including stock options and restricted stock. Employee accounting applies to awards granted by the Company or subsidiary in the company or subsidiary's shares only to its own employees, respectively. No sibling or upstream awards have been granted. Stock-based compensation expense was as follows (in thousands):
 
Years ended December 31,
 
2018
 
2017
 
2016
Overstock restricted stock awards
$
9,096

 
$
4,056

 
$
4,891

Medici Ventures stock options
412

 
21

 

tZERO equity awards
4,848

 

 

Total stock-based compensation expense
$
14,356

 
$
4,077

 
$
4,891



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Overstock stock option awards

Our Board of Directors adopted the Overstock.com, Inc. 2005 Equity Incentive Plan and it was most recently amended and restated and re-approved by the stockholders on May 9, 2017 (as so amended and restated, the "Plan"). Under the Plan, the Board of Directors may issue incentive stock options to employees and directors of the Company and non-qualified stock options to consultants, as well as restricted stock units and other types of equity awards of the Company. Options granted under this Plan generally expire at the end of ten years and vest in accordance with a vesting schedule determined by our Board of Directors, usually over four years from the grant date. We did not grant any options during the years ended December 31, 2018 , 2017 and 2016 . At December 31, 2018 , 1.8 million shares of stock remained available for future grants under the Plan. We settle stock option exercises with newly issued common shares. As of December 31, 2018 , there were no options outstanding under the Plan.

The following is a summary of stock option activity (in thousands, except per share data):
 
2018
 
2017
 
2016
 
Shares
 
Weighted
Average
Exercise
Price
 
Shares
 
Weighted
Average
Exercise
Price
 
Shares
 
Weighted
Average
Exercise Price
Outstanding—beginning of year

 
$

 
156

 
$
17.33

 
204

 
$
17.27

Exercised

 

 
(39
)
 
16.90

 
(42
)
 
17.08

Expired/Forfeited

 

 
(117
)
 
17.48

 
(6
)
 
17.08

Outstanding—end of year

 
$

 

 
$

 
156

 
$
17.33

Options exercisable at year-end

 
$

 

 
$

 
156

 
$
17.33

The most recent stock options were granted in May 2008 and have fully vested. There was no stock based compensation related to stock options recorded during the years ended December 31, 2018 , 2017 and 2016 .
    
The total intrinsic value of options exercised during the years ended December 31, 2018 , 2017 and 2016 was $0 , $54,000 , and $82,000 , respectively. The total cash received from employees as a result of employee stock option exercises during the years ended December 31, 2018 , 2017 and 2016 were approximately $0 , $664,000 , and $819,000 , respectively.

Overstock restricted stock awards

For the years ended December 31, 2018 , 2017 and 2016 , the Compensation Committee of the Board of Directors approved grants of  387,000 , 310,000 and 541,000 restricted stock awards, respectively, to our officers, board members and employees. These restricted stock awards vest over three years at  33.3%  at the end of the first year,  33.3%  at the end of the second year and  33.3%  at the end of the third year; subject to the recipient's continuing service to us. At December 31, 2018 , there were  559,000  unvested restricted stock awards that remained outstanding.

The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is either recognized on a straight-line basis over the three -year vesting schedule or on an accelerated schedule when vesting of restricted stock awards exceeds a straight-line basis. The cumulative amount of compensation expense recognized at any point in time is at least equal to the portion of the grant date fair value of the award that is vested at that date. The weighted average grant date fair value of restricted stock awards granted during the years ended December 31, 2018 , 2017 and 2016 was $65.42 , $17.75 and $14.52 , respectively.


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The following table summarizes restricted stock award activity (in thousands, except fair value data):
 
2018
 
2017
 
2016
 
Units
 
Weighted
Average
Grant Date
Fair Value
 
Units
 
Weighted
Average
Grant Date
Fair Value
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding—beginning of year
540

 
$
17.05

 
560

 
$
17.46

 
349

 
$
24.80

Granted at fair value
387

 
65.42

 
310

 
17.75

 
541

 
14.52

Vested
(234
)
 
17.68

 
(212
)
 
19.58

 
(219
)
 
22.57

Forfeited
(134
)
 
42.85

 
(118
)
 
16.21

 
(111
)
 
16.52

Outstanding—end of year
559

 
$
44.08

 
540

 
$
17.05

 
560

 
$
17.46


Medici Ventures stock options

The Medici Ventures, Inc. 2017 Stock Option Plan provides for the grant of options to employees and directors of and consultants to Medici Ventures to acquire up to  10%  of the authorized shares of Medici Ventures' common stock. During the  twelve months ended December 31, 2018 , Medici Ventures granted  94,450  stock options with a cumulative grant date fair value of  $1.8 million  which vest over a  three  year period. During the year ended December 31, 2017, Medici Ventures granted 74,750 stock options to certain Medici Ventures and Overstock employees with a cumulative grant date fair value of $91,000 , which will be expensed on a straight-line basis over the vesting period of  three  years.

tZERO equity awards

The tZERO.com 2017 Equity Incentive Plan provides for grant of options to employees and directors of and consultants to tZERO to acquire up to  5%  of the authorized shares of tZERO's common stock. In January 2018, tZERO granted 2,000,000 restricted stock awards (post-stock split) with a cumulative grant date fair value of  $4.0 million   under the equity incentive plan, all of which vested on January 23, 2018. Accordingly, there is no expense to be recognized in future periods related to these awards. As a result of these vested awards, our indirect ownership interest in tZERO was reduced from 81% to approximately  80% . During the  twelve months ended December 31, 2018 , tZERO granted awards to acquire  5,590,000  shares (post-stock split) of its stock with a cumulative grant date fair value of  $4.6 million  which will be expensed on a straight-line basis over the vesting period of  two  to  three  years. No awards were issued during the year ended December 31, 2017.


16. EMPLOYEE RETIREMENT PLAN

We have a 401(k) defined contribution plan which permits participating employees to defer a portion of their compensation, subject to limitations established by the Internal Revenue Code. During the years ended December 31, 2018 , 2017 and 2016 , employees who completed 3 months of service and are 21 years of age or older are qualified to participate in the plan which matches 100% of the first 6% of each participant's contributions to the plan subject to IRS limits. Matching contributions vest immediately. Participant contributions also vest immediately. Our matching contribution totaled $5.5 million , $4.1 million and $3.8 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. We made no discretionary contributions to eligible participants for the years ended December 31, 2018 , 2017 and 2016 , respectively.


17. OTHER INCOME (EXPENSE), NET

Other income (expense), net consisted of the following (in thousands):
 
 
Years ended December 31,
 
 
2018
 
2017
 
2016
Club O Rewards and gift card breakage
 
$

 
$
2,742

 
$
16,808

Gain on investment in precious metals
 

 
1,971

 
201

Loss on equity investments, net
 
(2,843
)
 
(5,995
)
 
(2,850
)
Other
 
(645
)
 
2,460

 
22

Total other income (expense), net
 
$
(3,488
)
 
$
1,178

 
$
14,181


115




18. INCOME TAXES
    
For financial reporting purposes, income (loss) before income taxes includes the following components (in thousands):
 
 
Years ended December 31,
 
 
2018
 
2017
 
2016
United States
 
$
(219,585
)
 
$
(48,039
)
 
$
20,974

Foreign
 
(369
)
 
305

 
(429
)
Total income (loss) before income taxes
 
$
(219,954
)
 
$
(47,734
)
 
$
20,545


The provision (benefit) for income taxes for 2018 , 2017 and 2016 consists of the following (in thousands):
 
 
Years ended December 31,
 
 
2018
 
2017
 
2016
Current:
 
 
 
 
 
 
Federal
 
$
(57
)
 
$
365

 
$
280

State
 
(141
)
 
280

 
1,264

Foreign
 
44

 
57

 
34

Total current
 
(154
)
 
702

 
1,578

Deferred:
 
 
 
 
 
 
Federal
 
(1,583
)
 
56,350

 
7,311

State
 
(645
)
 
7,146

 
410

Foreign
 
(2
)
 
(10
)
 
(2
)
Total deferred
 
(2,230
)
 
63,486

 
7,719

Total provision (benefit) for income taxes
 
$
(2,384
)
 
$
64,188

 
$
9,297


The provision (benefit) for income taxes for 2018 , 2017 and 2016 differ from the amounts computed by applying the U.S. federal income tax rate of 21% for 2018 and 35% for 2017 and 2016 to income (loss) before income taxes for the following reasons (in thousands):
 
 
Year ended December 31,
 
 
2018
 
2017
 
2016
U.S. federal income tax provision (benefit) at statutory rate
 
$
(46,190
)
 
$
(16,707
)
 
$
7,191

State income tax expense, net of federal benefit
 
(8,289
)
 
(2,480
)
 
1,232

Research and development credit
 
(1,734
)
 
(1,696
)
 
(1,078
)
Stock based compensation expense
 
(1,260
)
 
164

 
674

Other
 
1,652

 
581

 
110

Gain on subsidiary stock
 
2,192

 

 

Reduction in federal rate
 

 
25,287

 

Change in valuation allowance
 
51,245

 
59,039

 
1,168

Total provision (benefit) for income taxes
 
$
(2,384
)
 
$
64,188

 
$
9,297


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The components of our deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows (in thousands):
 
 
December 31,
 
 
2018
 
2017
Deferred tax assets:
 
 
 
 
Net operating loss carryforwards
 
$
79,820

 
$
29,350

Research and development tax credits
 
15,382

 
12,653

Accrued expenses
 
7,898

 
10,672

Reserves and other
 
5,345

 
1,480

Basis difference in investments
 
4,857

 
1,636

Fixed and intangible assets
 
2,493

 
8,068

Other tax credits
 
206

 
220

Gross deferred tax assets
 
116,001

 
64,079

Valuation allowance
 
(114,523
)
 
(63,278
)
Total deferred tax assets
 
1,478

 
801

Deferred tax liabilities:
 
 
 
 
Prepaid expenses
 
(880
)
 
(788
)
Goodwill
 
(489
)
 
(261
)
Fixed assets
 

 

Total deferred tax liabilities
 
(1,369
)
 
(1,049
)
Total deferred tax assets (liabilities), net
 
$
109

 
$
(248
)

At December 31, 2018 , we have federal net operating loss carryforwards with no expiration date of approximately $168.6 million and federal net operating loss carryforwards of approximately $152.3 million which primarily expire between 2020 and 2037 if unused. We have state net operating loss carryforwards of approximately $286.9 million , which primarily expire between 2021 and 2033 if unused. At December 31, 2018 , we have federal research credit carryforwards of approximately $16.4 million and state research credit carryforwards of approximately $6.9 million . These tax credits expire at various dates between 2021 and 2038 if unused. Ownership changes under Internal Revenue Code Section 382 could limit the amount of net operating losses or credit carryforwards that can be used in any annual period.

Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess the available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have limited carryback ability and do not have significant taxable temporary differences to recover our existing deferred tax assets, therefore we must rely on future taxable income, including tax planning strategies, to support their realizability. We have established a valuation allowance for our deferred tax assets not supported by carryback ability or taxable temporary differences, primarily due to uncertainty regarding our future taxable income. We have considered, among other things, the cumulative loss incurred over the three-year period ended December 31, 2018, as a significant piece of objective negative evidence. We intend to continue maintaining a valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the deferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as long-term projections for growth. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.

Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), following its passage by the United States Congress. Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. As of December 31, 2017, we were able to reasonably estimate certain effects and, therefore, recorded adjustments associated with the remeasurement of certain deferred tax assets and liabilities and the mandatory deemed repatriation of cumulative foreign earnings. Our accounting for the following elements of the TCJA was completed as of September 30, 2018. The expense related to the remeasurement of certain deferred tax assets and

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liabilities, based on the rates at which they are expected to reverse in the future, was  $25.2 million . The expense related to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings was  $47,000 . We did not make any measurement-period adjustments related to these items during the year because there were no significant changes to our provisional amounts, and therefore, there is no impact to our effective tax rate due to measurement-period adjustments.

The TCJA includes a provision to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries beginning in 2018. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into our measurement of deferred taxes. We will elect to treat any potential GILTI inclusions as a period cost as we are not projecting any material impact from GILTI inclusions and any deferred taxes related to any inclusion would be immaterial.

A reconciliation of the beginning and ending unrecognized tax benefits, excluding interest and penalties, as of December 31, 2018 , 2017 and 2016 is as follows (in thousands):
 
 
Year ended December 31,
 
 
2018
 
2017
 
2016
Beginning balance
 
$
6,964

 
$
7,333

 
$
4,753

Additions for tax positions related to the current year
 
1,013

 
881

 
1,112

Additions (reductions) for tax positions taken in prior years
 
332

 
230

 
1,468

Reduction for tax positions settled by utilizing tax attributes
 
(335
)
 
(1,480
)
 

Ending balance
 
$
7,974

 
$
6,964

 
$
7,333


Included in the balance of unrecognized tax benefits as of December 31, 2018 , 2017 and 2016 , are approximately $8.0 million , $7.0 million , and $5.9 million , respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2018 , 2017 and 2016 , are approximately $0 , $0 , and $1.5 million , respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes. We believe it is reasonably possible that these unrecognized tax benefits will continue to increase in the future.

Accrued interest and penalties on unrecognized tax benefits as of December 31, 2018 and 2017 were $499,000 and $492,000 , respectively.

We are subject to taxation in the United States and various state and foreign jurisdictions. Tax years beginning in 2014 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. We are currently under audit in Ireland for the 2016 tax year.

We have indefinitely reinvested foreign earnings of $1.4 million at December 31, 2018. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.
 

19. RELATED PARTY TRANSACTIONS

PCL L.L.C. term loan repayment
    
On November 6, 2017, we entered into a loan agreement with PCL L.L.C., an entity directly or indirectly wholly-owned by the mother and brother of our President and Chief Executive Officer, Dr. Patrick M. Byrne ("Dr. Byrne"). The agreement provides for a  $40.0 million  term loan (the "PCL Loan") which carries an annual interest rate of  8.0% . On May 8, 2018, our Board of Directors approved a prepayment of the PCL Loan and we repaid the entire outstanding balance under the loan plus accrued interest.

SiteHelix     

On June 28, 2018, we entered into and concurrently closed a Stock Purchase Agreement with the stockholders of SiteHelix, Inc., a Delaware corporation ("SiteHelix") pursuant to which we purchased all of the common stock of SiteHelix for  $500,000  plus  100,000  shares of Overstock common stock with a transaction date fair value of  $2.9 million  for an aggregate purchase price of  $3.4 million . The transaction was accounted for as an asset purchase consisting primarily of internal-use software designed to provide a customized user experience for visitors to our Website. Saum Noursalehi, who owned

118


approximately  62%  of the SiteHelix common stock, is a member of our Board of Directors and served as President, Retail, of Overstock until May 8, 2018, when he became Chief Executive Officer of tZERO.

Bitsy Agreement
    
In July 2018, Medici Ventures entered into a stock purchase agreement with Bitsy, Inc. ("Bitsy") to acquire an additional  25%  equity interest in Bitsy for  $3.0 million  and  $1.5 million  worth of Overstock.com common stock ( 47,378  shares). Subsequent to the purchase, Medici Ventures held a  33%  interest in Bitsy. Bitsy is a U.S.-based startup company that plans to build a regulatory-compliant bridge between the U.S. Dollar and cryptocurrencies and offer our customers the ability to purchase cryptocurrencies on or through the Bitsy app and our Website. Bitsy was founded by Steve Hopkins, Medici Ventures' former chief operating officer and general counsel, and current president of tZERO, who held a 25%  equity interest in Bitsy. Our equity interest is included in our equity investments on our consolidated balance sheets.

On December 21, 2018, tZERO entered into a stock purchase agreement with the owners of Bitsy to acquire the remaining 67% equity interest in Bitsy for $8.0 million with effective control of Bitsy transferring to tZERO effective January 1, 2019. As tZERO paid the $8.0 million purchase price prior to the effective date of the transaction, the payment is included in Other long-term assets in our consolidated balance sheets as a deposit on purchase of a business. In connection with the stock purchase agreement, Medici Ventures transferred its 33% equity interest to tZERO. Our purchase accounting has not yet been finalized for the transaction, as we are still finalizing our valuation of assets acquired and liabilities assumed.

Chainstone Labs

In September 2018, Medici Ventures entered into a stock purchase agreement with Chainstone Labs, Inc. ("Chainstone") to acquire a  29%  equity interest in Chainstone for  $3.6 million . Chainstone is a U.S.-based startup company founded and  71%  owned by a Board member of Medici Ventures, Bruce Fenton. Chainstone is focused on blockchain, tokenization of securities, and decentralized asset management. Our equity interest is included in our equity investments on our consolidated balance sheets.

Medici Land Governance

Medici Land Governance Inc., a Delaware public benefit corporation ("MLG"), was formed by Medici Ventures with Dr. Byrne. Pursuant to the Subscription Agreements dated September 21, 2018, Medici Ventures contributed certain of its assets, including intellectual property relating to technologies regarding land governance and property rights, to MLG in exchange for  510,000  shares of MLG common stock and at the same time Dr. Byrne personally contributed  $6.7 million  in cash to MLG in exchange for  390,000  shares of MLG common stock. At the same time MLG, Medici Ventures, and Dr. Byrne entered into a Stockholders Agreement dated September 21, 2018 regarding MLG (the "MLG Stockholder Agreement"). The MLG Stockholder Agreement restricts the transfer of the shares held by Medici Ventures and Dr. Byrne, creates rights of first refusal in favor of MLG, Medici Ventures, and Dr. Byrne to acquire shares to be sold by Medici Ventures or Dr. Byrne, creates purchase rights in favor of MLG and Medici Ventures in the event of the death or incapacity of Dr. Byrne, creates preemptive rights in favor of MLG and Medici Ventures if MLG proposes to sell capital stock to any other person (subject to certain exceptions), provides for voting for board members, and requires a supermajority consent of the stockholders for any sale of MLG or substantially all of its assets, merger, consolidation, or other transaction having substantially the same effect.

As a result of the transactions described above, Medici Ventures holds approximately  57%  of the outstanding capital stock of MLG, and Dr. Byrne, our President and Chief Executive Officer, a member of our Board of Directors and our largest stockholder, holds approximately  43%  of the outstanding capital stock of MLG. Dr. Byrne is also a member of the board of directors of MVI and is a member of the board of directors of MLG. The financial results of MLG are included in our consolidated financial statements.


20. BROKER DEALERS

tZERO wholly owns each of two  broker dealers, SpeedRoute LLC ("SpeedRoute") and PRO Securities LLC ("PRO Securities"), which we acquired in January 2016.

SpeedRoute is an electronic, agency-only, FINRA-registered broker dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are registered broker dealers. SpeedRoute does not hold, own, or sell securities.

119


PRO Securities is a FINRA-registered broker dealer that owns and operates the PRO Securities alternative trading system ("ATS"), which is registered with the SEC. An ATS is a trading system that is not regulated as an exchange, but is a licensed venue for matching buy and sell orders. The PRO Securities ATS is a closed system available only to its broker dealer subscribers. PRO Securities does not accept orders from non-broker dealers, nor does it hold, own, or sell securities.
SpeedRoute and PRO Securities are subject to the SEC's Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed  15  to 1 and that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At December 31, 2018 , SpeedRoute had net capital of  $1,251,579 , which was  $1,152,854  in excess of its required net capital of  $98,725  and SpeedRoute's net capital ratio was  1.2  to 1. At  December 31, 2018 , PRO Securities had net capital of  $13,958 , which was  $8,958  in excess of its required net capital of  $5,000  and PRO Securities net capital ratio was  2  to 1. At December 31, 2017 , SpeedRoute had net capital of  $334,848 , which was  $233,485  in excess of its required net capital of  $101,363  and SpeedRoute's net capital ratio was  4.5  to 1. At  December 31, 2017 , PRO Securities had net capital of  $24,175 , which was  $19,175  in excess of its required net capital of  $5,000  and PRO Securities net capital ratio was  1.3  to 1.

SpeedRoute and PRO Securities did not have any securities owned or securities sold, not yet purchased at December 31, 2018 and 2017 .


21. BUSINESS SEGMENTS
 
Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. As described in Note 1—Basis of Presentation, we have recast our segment information to conform with current year presentation. We determined our segments based on how we manage our business. In the fourth quarter of 2018, we completed our review of our segment reporting and in light of a strategic shift in our Chief Operating Decision Maker's long-term strategic focus for our organization, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, Direct and Partner are no longer considered separate reportable segments but are included under Retail in our Business Segment disclosures. Our Medici business includes one reportable segment, tZERO. We use pre-tax net income (loss) as the measure to determine our reportable segments. As a result, the remainder of our Medici business is not significant as compared to our Retail and tZERO segments. Our Other segment consists of Medici Ventures' remaining operations.

Our Retail segment primarily consists of amounts earned through e-commerce sales through our Website. In addition, substantially all our corporate support costs (administrative functions such as finance, human resources, and legal) are included within our Retail segment.

Our tZERO segment primarily consists of amounts earned through securities transaction through our broker-dealers and costs incurred to execute our tZERO business initiatives.

We do not allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There were no significant inter-segment sales or transfers during the years ended December 31, 2018 , 2017 and 2016 .

The following table summarizes information about reportable segments and a reconciliation to consolidated net income (loss) for the years ended December 31, 2018 , 2017 and 2016 (in thousands):

 
 
Retail
 
tZERO
 
Other
 
Total
2018
 
 
 
 
 
 
 
 

Revenue, net
 
$
1,800,187

 
$
19,043

 
$
2,362

 
$
1,821,592

Cost of goods sold
 
1,452,195

 
13,127

 
2,362

 
1,467,684

Gross profit
 
347,992

 
5,916

 

 
353,908

Operating expenses
 
506,113

 
47,006

 
17,995

 
571,114

Interest and other income (expense), net (1)
 
(476
)
 
233

 
(2,505
)
 
(2,748
)
Pre-tax loss
 
$
(158,597
)
 
$
(40,857
)
 
$
(20,500
)
 
(219,954
)
Benefit for income taxes
 
 
 
 
 
 
 
(2,384
)
Net loss (2)
 
 
 
 
 
 
 
$
(217,570
)
 
 
 
 
 
 
 
 
 

120


 
 
Retail
 
tZERO
 
Other
 
Total
2017
 
 
 
 
 
 
 
 

Revenue, net
 
$
1,728,104

 
$
16,493

 
$
159

 
$
1,744,756

Cost of goods sold
 
1,392,558

 
11,647

 

 
1,404,205

Gross profit
 
335,546

 
4,846

 
159

 
340,551

Operating expenses
 
365,648

 
17,101

 
4,436

 
387,185

Interest and other income (expense), net (1)
 
4,680

 

 
(5,780
)
 
(1,100
)
Pre-tax loss
 
$
(25,422
)
 
$
(12,255
)
 
$
(10,057
)
 
(47,734
)
Provision (benefit) for income taxes
 
 
 
 
 
 
 
64,188

Net loss (2)
 
 
 
 
 
 
 
$
(111,922
)
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 

Revenue, net
 
$
1,784,782

 
$
15,181

 
$

 
$
1,799,963

Cost of goods sold
 
1,458,411

 
10,203

 

 
1,468,614

Gross profit
 
326,371

 
4,978

 

 
331,349

Operating expenses
 
307,669

 
15,826

 
939

 
324,434

Interest and other income (expense), net (1)
 
13,630

 

 

 
13,630

Pre-tax income (loss)
 
$
32,332

 
$
(10,848
)
 
$
(939
)
 
20,545

Provision (benefit) for income taxes
 
 
 
 
 
 
 
9,297

Net income (loss) (2)
 
 
 
 
 
 
 
$
11,248

  ___________________________________________
(1)
— The above amounts exclude intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $3.5 million , $2.0 million , and $594,000 for the years ended December 31, 2018 , 2017 and 2016 , respectively.
(2)
— Pre-tax income (loss) presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.

    For the years ended December 31, 2018 , 2017 and 2016 , substantially all our sales revenues were attributable to customers in the United States. At December 31, 2018 and 2017 , substantially all our fixed assets were located in the United States.


22. SUBSEQUENT EVENTS

On January 18, 2019, tZERO sold its entire equity interest in one of its equity method investments which had a carrying value of $5.8 million for $5.9 million .

In February 2019, we executed a Memorandum of Understanding regarding a potential transaction involving an equity investment of up to $100 million in tZERO by GSR Capital and Makara Capital, and are in continuing discussions in furtherance thereof.


23. QUARTERLY RESULTS OF OPERATIONS (unaudited)

The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period ended December 31, 2018 . We have prepared this information on the same basis as the consolidated statements of operations and the information includes all adjustments that we consider necessary for a fair statement of its financial position and operating results for the quarters presented.

121


 
 
Three Months Ended
 
 
March 31,
2018
 
June 30,
2018
 
September 30,
2018
 
December 31,
2018
 
 
(in thousands, except per share data)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
Revenue, net
 
 
 
 
 
 
 
 
Retail
 
$
439,996

 
$
477,683

 
$
435,775

 
$
446,733

Other
 
5,335

 
5,450

 
4,805

 
5,815

Total net revenue
 
445,331

 
483,133

 
440,580

 
452,548

Cost of goods sold
 
 
 
 
 
 
 
 
Retail
 
347,580

 
387,252

 
350,651

 
366,712

Other
 
3,882

 
4,138

 
3,213

 
4,256

Total cost of goods sold
 
351,462

 
391,390

 
353,864

 
370,968

Gross profit
 
93,869

 
91,743

 
86,716

 
81,580

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
77,214

 
94,416

 
55,312

 
47,537

Technology
 
31,294

 
32,423

 
33,880

 
34,557

General and administrative
 
39,755

 
31,440

 
45,356

 
47,930

Total operating expenses
 
148,263

 
158,279

 
134,548

 
130,024

Operating loss
 
(54,394
)
 
(66,536
)
 
(47,832
)
 
(48,444
)
Interest income
 
544

 
620

 
383

 
661

Interest expense
 
(874
)
 
(395
)
 
(101
)
 
(98
)
Other income (expense), net
 
(9
)
 
368

 
(1,848
)
 
(1,999
)
Net loss before income taxes
 
(54,733
)
 
(65,943
)
 
(49,398
)
 
(49,880
)
Benefit for income taxes
 
(277
)
 
(27
)
 
(141
)
 
(1,939
)
Consolidated net loss
 
(54,456
)
 
(65,916
)
 
(49,257
)
 
(47,941
)
Less: Net loss attributable to noncontrolling interests
 
(3,547
)
 
(1,005
)
 
(1,334
)
 
(5,614
)
Net loss attributable to stockholders of Overstock.com, Inc.
 
$
(50,909
)
 
$
(64,911
)
 
$
(47,923
)
 
$
(42,327
)
Net loss per common share—basic:
 
 
 
 
 
 
 
 
Net loss attributable to common shares—basic
 
$
(1.74
)
 
$
(2.20
)
 
$
(1.55
)
 
$
(1.39
)
Weighted average common shares outstanding—basic
 
28,566

 
28,903

 
30,279

 
32,112

Net loss per common share—diluted:
 
 
 
 
 
 
 
 
Net loss attributable to common shares—diluted
 
$
(1.74
)
 
$
(2.20
)
 
$
(1.55
)
 
$
(1.39
)
Weighted average common shares outstanding—diluted
 
28,566

 
28,903

 
30,279

 
32,112



122


 
 
Three Months Ended
 
 
March 31,
2017
 
June 30,
2017
 
September 30,
2017
 
December 31,
2017
 
 
(in thousands, except per share data)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
Revenue, net
 
 
 
 
 
 
 
 
Retail
 
$
428,089

 
$
427,955

 
$
420,064

 
$
451,996

Other
 
4,346

 
4,069

 
3,943

 
4,294

Total net revenue
 
432,435

 
432,024

 
424,007

 
456,290

Cost of goods sold
 
 
 
 
 
 
 
 
Retail
 
342,260

 
345,039

 
337,698

 
367,561

Other
 
3,268

 
2,814

 
2,634

 
2,931

Total cost of goods sold
 
345,528

 
347,853

 
340,332

 
370,492

Gross profit
 
86,907

 
84,171

 
83,675

 
85,798

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
37,618

 
43,297

 
45,153

 
54,521

Technology
 
28,992

 
28,244

 
28,746

 
29,896

General and administrative
 
22,610

 
22,361

 
21,651

 
24,096

Total operating expenses
 
89,220

 
93,902

 
95,550

 
108,513

Operating loss
 
(2,313
)
 
(9,731
)
 
(11,875
)
 
(22,715
)
Interest income
 
125

 
136

 
189

 
209

Interest expense
 
(710
)
 
(716
)
 
(713
)
 
(798
)
Other income (expense), net
 
(3,724
)
 
593

 
5,882

 
(1,573
)
Net loss before income taxes
 
(6,622
)
 
(9,718
)
 
(6,517
)
 
(24,877
)
Provision (benefit) for income taxes
 
(340
)
 
(1,975
)
 
(5,412
)
 
71,915

Consolidated net loss
 
(6,282
)
 
(7,743
)
 
(1,105
)
 
(96,792
)
Less: Net loss attributable to noncontrolling interests
 
(379
)
 
(244
)
 
(319
)
 
(1,102
)
Net income (loss) attributable to stockholders of Overstock.com, Inc.
 
$
(5,903
)
 
$
(7,499
)
 
$
(786
)
 
$
(95,690
)
Net income (loss) per common share—basic:
 
 
 
 
 
 
 
 
Net income (loss) per share—basic
 
$
(0.23
)
 
$
(0.29
)
 
$
(0.03
)
 
$
(3.72
)
Weighted average common shares outstanding—basic
 
25,290

 
24,996

 
25,003

 
25,103

Net income (loss) per common share—diluted:
 
 
 
 
 
 
 
 
Net income (loss) per share—diluted
 
$
(0.23
)
 
$
(0.29
)
 
$
(0.03
)
 
$
(3.72
)
Weighted average common shares outstanding—diluted
 
25,290

 
24,996

 
25,003

 
25,103



123



Schedule II
Valuation and Qualifying Accounts
(in thousands)

 
 
Balance at
Beginning of
Year
 
Charged to
Expense
 
Deductions
 
Balance at
End of Year
Year ended December 31, 2018
 
 
 
 
 
 
 
 
Deferred tax valuation allowance
 
$
63,278

 
$
51,245

 
$

 
$
114,523

Allowance for sales returns
 
17,391

 
174,864

 
176,994

 
15,261

Allowance for doubtful accounts
 
1,253

 
883

 
20

 
2,116

Year ended December 31, 2017
 
 
 
 
 
 
 
 
Deferred tax valuation allowance
 
$
4,239

 
$
59,039

 
$

 
$
63,278

Allowance for sales returns
 
18,176

 
169,398

 
170,183

 
17,391

Allowance for doubtful accounts
 
1,999

 
309

 
1,055

 
1,253

Year ended December 31, 2016
 
 
 
 
 
 
 
 
Deferred tax valuation allowance
 
$
3,071

 
$
1,168

 
$

 
$
4,239

Allowance for sales returns
 
17,896

 
163,693

 
163,413

 
18,176

Allowance for doubtful accounts
 
465

 
1,608

 
74

 
1,999




124


Exhibit 10.1

Form of

OVERSTOCK.COM, INC.

INDEMNIFICATION AGREEMENT


THIS AGREEMENT (the “ Agreement ”) is made and entered into as of __________, by and between Overstock.com, Inc., a Delaware corporation (the “ Company ”), and __________________ (“ Indemnitee ”).
RECITALS
WHEREAS , Indemnitee performs a valuable service for the Company; and
WHEREAS , the Board of Directors of the Company has adopted Bylaws (the “ Bylaws ”) providing for the indemnification of the officers and directors of the Company to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended (“ Delaware Law ”); and
WHEREAS , the Bylaws and Delaware Law, by their nonexclusive nature, permit contracts between the Company and the officers or directors of the Company with respect to indemnification of such officers or directors; and
WHEREAS , in accordance with the authorization as provided by Delaware Law, the Company may purchase and maintain a policy or policies of directors’ and officers’ liability insurance (“ D & O Insurance ”), covering certain liabilities which may be incurred by its officers or directors in the performance of their obligations to the Company; and
WHEREAS , in order to induce Indemnitee to continue to serve as an officer or director of the Company, the Company has determined and agreed to enter into this contract with Indemnitee; and
WHEREAS , the Board of Directors of the Company has previously approved the form and substance of this Agreement, and the Company and Indemnitee may previously have entered into an Indemnification Agreement substantially identical to this Agreement, but at present neither the Company nor Indemnitee has been able to locate an executed copy of any such prior Indemnification Agreement, and the Company and Indemnitee desire to execute and deliver this Agreement in order to ensure that each of them has an executed original of this Agreement;
NOW, THEREFORE , in consideration of Indemnitee’s service as an officer or director after the date hereof, the parties hereto agree as follows:
1. Indemnity of Indemnitee . The Company hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of Delaware Law, as such may be amended from time to time, and the Bylaws, as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof:

(a) Proceedings Other Than Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification provided in this Section l(a) if, by reason of his/her Corporate Status (as hereinafter defined), he/she is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him/her or on his/her behalf in connection with such Proceeding or any claim, issue or matter therein, if he/she acted in good faith and in a manner he/she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his/her conduct was unlawful.

(b) Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his/her Corporate Status, he/she is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him/her or on his/her behalf in connection with such Proceeding if he/she acted in good faith and in a manner he/she reasonably believed to be in or not opposed to the best interests of the Company; provided, however , that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the





Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made.

(c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his/her Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he/she shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him/her or on his/her behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him/her or on his/her behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

2. Additional Indemnity . In addition to, and without regard to any limitations on, the indemnification provided for in Section 1, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him/her or on his/her behalf if, by reason of his/her Corporate Status, he/she is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company’s obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be unlawful under Delaware law.

3. Contribution in the Event of Joint Liability .

(a) Whether or not the indemnification provided in Section 1 and Section 2 above is available, in respect of any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. Company shall not enter into any settlement of any action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee.

(b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall contribute to the amount of expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary, and the degree to which their conduct is active or passive.

(c) Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors or employees of the Company other than Indemnitee who may be jointly liable with Indemnitee.

4. Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his/her Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he/she shall be indemnified against all Expenses actually and reasonably incurred by him/her or on his/her behalf in connection therewith.






5. Advancement of Expenses . Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee’s Corporate Status within 10 days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within 30 days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed).

6. Procedures and Presumptions for Determination of Entitlement to Indemnification . It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the law and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:

(a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Company’s Board of Directors in writing that Indemnitee has requested indemnification.

(b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following three methods, which shall be at the election of Indemnitee: (i) by a majority vote of the disinterested directors, even though less than a quorum, or (ii) by independent legal counsel in a written opinion, or (iii) by the stockholders.

(c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). The Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors). Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed.

(d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence.






(e) Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner she reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence.

(f) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 30 days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however , that such 30-day period may be extended for a reasonable time, not to exceed an additional 15 days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation or information relating thereto; and provided, further , that the foregoing provisions of this Section 6(g) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within 15 days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within 75 days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within 15 days after such receipt for the purpose of making such determination, such meeting is held for such purpose within 60 days after having been so called and such determination is made thereat.

(g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Company’s Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee’s entitlement to indemnification. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence.

7. Remedies of Indemnitee .

(a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within 10 days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within 10 days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his/her entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a). The Company shall not oppose Indemnitee’s right to seek any such adjudication.






(b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination under Section 6(b).

(c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7, absent a prohibition of such indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company the Company shall pay on his/her behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him/her in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery.

(e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement.

8. Non‑Exclusivity; Survival of Rights; Insurance; Subrogation .

(a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation of the Company, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his/her Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware Law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies.

(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

9. Exception to Right of Indemnification . Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors of the Company or (b) such Proceeding is being brought by the Indemnitee to assert, interpret or enforce his/her rights under this Agreement.

10. Duration of Agreement . All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of his/her Corporate Status, whether or not he/she is acting or serving in any such capacity at the time any liability or expense is incurred





for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or any other Enterprise at the Company’s request.

11. Security . To the extent requested by the Indemnitee and approved by the Company’s Board of Directors, the Company may at any time and from time to time provide security to the Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee

12. Enforcement .

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

13. Definitions . For purposes of this Agreement:

(a) Corporate Status ” describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company.

(b) Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(c) Enterprise ” shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary.

(d) Expenses ” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding.

(e) Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “ Independent Counsel ” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

(f) Proceeding ” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director of the Company, by reason of any action taken by him/her or of any inaction on his/her part while acting as an officer or director of the Company, or by reason of the fact that he/she is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not he/she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement; and excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his/her rights under this Agreement.






14. Severability . If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

15. Modification and Waiver . No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

16. Notice By Indemnitee . Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.

17. Notices . All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

(a) If to Indemnitee, to the address set forth below Indemnitee signature hereto.

(b)
If to the Company, to:

Overstock.com, Inc.
799 West Coliseum Way
Midvale, Utah 84047
Attention: Secretary

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
18. Identical Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

19. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

20. Governing Law . The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware without application of the conflict of laws principles thereof.

21. Gender . Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate.







IN WITNESS WHEREOF , the parties hereto have executed this Indemnification Agreement as of the date first above written.
OVERSTOCK.COM, INC.



By:     ______________________________
[Name; Title]

Address:     799 W. Coliseum Way
Midvale, Utah 84047



    
AGREED TO AND ACCEPTED:



INDEMNITEE:



______________________________
[Name]
Address:______________________________
        
______________________________






Exhibit 10.16(a)
 
Summary of Unwritten Compensation Arrangements
Applicable to Non-Employee Directors of Overstock.com, Inc.


During 2019 the Company expects to pay its non-employee directors other than the Chairwoman of the Board $75,000 annually at the rate of $18,750 per quarter, and expects to pay the Chairwoman of the Board $150,000 annually at the rate of $37,500 per quarter. The Company also expect to continue to grant restricted stock units to its non-employee directors, generally at the first Board meeting after a non-employee director first joins the Board, and typically annually thereafter, but subject to the total compensation limitations established in the Company’s 2005 Equity Incentive plan, as amended from time to time. The Company also reimburses non-employee directors for out-of-pocket expenses incurred in connection with attending Board and committee meetings. Haverford Valley, L.C., an affiliate of the Company, and certain affiliated entities which make travel arrangements for the Company's executives, also occasionally make travel arrangements for non-employee directors to attend Board meetings.






MEDICI VENTURES, INC.
NONQUALIFIED STOCK OPTION AGREEMENT

This Nonqualified Stock Option Agreement (" Option Agreement ") is between Medici Ventures, Inc., Delaware corporation (the " Company "), and ___________________________ (" Optionee "), who agree as follows:

Section 1.      Introduction . The Company has previously adopted the Medici Ventures, Inc. Stock Option Plan (the " Plan ") for the purpose of providing eligible Employees, Directors and Consultants (as defined in the Plan) with increased incentive to render services, to exert maximum effort for the business success of the Company and to strengthen the identification of such individuals with the shareholders. The Company, acting through the Administrator (as defined in the Plan), has determined that its interests will be advanced by the issu-ance to Optionee of an Option under the Plan.

Section 2.      Option . Subject to the terms and conditions contained herein, the Company hereby irrevocably grants to Optionee the right and option (" Option ") to purchase from the Company ________ shares of the Company's common stock, $0.01 par value (" Common Stock "), at an Option Exercise Price of $______ per share.

Section 3.      Option Period . The Option herein granted may be exercised by Optionee in whole or in part at any time during a ten (10) year period (the " Option Period ") beginning on _______________ (the " Date of Grant "), subject to the limitation that the Option shall not be exercisable for more than a percen-tage of the aggregate number of shares offered by the Option determined by the number of Optionee's full years of employment with the Company from the Date of Grant to the date of such exercise, in accordance with the following schedule:

Number of                 Percentage of
Full Years                      Shares Purchasable

___1                            ___%
___2                            ___%
___3                            ___%

Notwithstanding anything in this Option Agreement to the contrary, the Administrator, in its sole discretion, may waive the foregoing schedule of vesting and upon written notice to Optionee, accelerate the earliest date or dates on which any of the Options granted hereunder are exercisable.

Section 4.      Procedure for Exercise . The Option herein granted may be exercised by the delivery by Optionee of written notice to the Secretary of the Company setting forth the number of shares of Common Stock with respect to which the Option is being exer-cised. The Option Exercise Price shall be paid, to the extent permitted by Applicable Laws, either (a) in cash or by certified or bank check at the time the Option is exercised or (b) in the discretion of the Administrator, upon such terms as the Administrator shall approve: (i) by delivery to the Company of shares of Common Stock, duly endorsed for transfer to the Company, with a Fair Market Value on the date of delivery equal to the Option Exercise Price (or portion thereof) due for the number of shares being acquired; (ii) by a "net exercise" procedure effected by withholding the minimum number of shares of Common Stock otherwise issuable in respect of the Option that are needed to pay the Option Exercise Price; (iii) by any combination of the foregoing methods; or (iv) in any other form of legal consideration that may be acceptable to the Administrator. If the Option Exercise Price is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, it shall be paid only by shares of Common Stock that have been held for more than six months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). Notice may also be delivered by fax provided that the Option Exercise Price of such shares is received by the Company via wire transfer on the same day the fax transmission is received by the Company. The notice shall specify the address to which the certificates for such shares are to be mailed. This Option shall be deemed to have been exercised immediately prior to the close of business on the date (i) written notice of such exercise and (ii) payment in full of the exercise price for the number of share for which Options are being exercised, are both received by the Company and Optionee shall be treated for all purposes as the record holder of such shares of Common Stock as of such date.

As promptly as practic-able after receipt of such written notice and payment, the Company shall deliver to Optionee certificates for the number of shares with respect to which such Option has been so exercised, issued in Optionee's name or such other name as Optionee directs; provided, however, that such delivery shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited such certifi-cates in the United States mail, addressed to Optionee at the address specified pursuant to this Section 4.






Section 5.      Termination of Continuous Service . In the event Optionee's Continuous Service terminates, Optionee may exercise the Option (to the extent that Optionee was entitled to exercise the Option as of the date of termination) until the expiration of the Option Period; provided that, if the termination of Continuous Service is by the Company for Cause, the entire Option (whether or not vested) shall immediately terminate and cease to be exercisable. If, after termination, Optionee does not exercise the Option before the expiration of the Option Period, the Option shall terminate.

Section 6.      Transferability . This Option shall not be trans-fer-able by Optionee otherwise than by Optionee's will or by the laws of descent and distribution. During the lifetime of Optionee, the Option shall be exercisable only by Optionee or his authorized legal representative. Any heir or legatee of Optionee shall take rights herein granted subject to the terms and conditions hereof. No such trans-fer of this Option Agreement to heirs or legatees of Optionee shall be effec-tive to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of such evidence as the Administrator may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions here-of.

Section 7.      No Rights as Shareholder . Optionee shall have no rights as a shareholder with respect to any shares of Common Stock covered by this Option Agreement until the Option is exercised by written notice and accompanied by payment as provided in Section 4 of this Option Agreement.

Section 8.      Adjustments . The shares of Common Stock subject to the Option may be adjusted or terminated in any manner as contemplated by Section 10 of the Plan.

Section 9.      Change in Control . In the event of a Change in Control, the provisions of Section 11 of the Plan shall apply.

Section 10.    RESERVED

Section 11.      Shareholders' Agreement . Optionee acknowledges that, in connection with the grant, vesting and/or exercise of this Option, the Administrator may require Optionee to execute and become a party to the Shareholders' Agreement as a condition of such grant, vesting and/or exercise.

Section 12.      Compliance With Securities Laws . Upon the acqui-si-tion of any shares pursuant to the exercise of the Option herein granted, Optionee (or any person acting under Section 6) will enter into such written representations, warranties and agreements as the Company may reasonably request in order to comply with applicable securities laws or with this Option Agreement.

Section 13.      Compliance With Laws . Notwithstanding any of the other provisions here-of, Optionee agrees that he or she will not exercise the Option granted hereby, and that the Company will not be obligated to issue any shares pursuant to this Option Agreement, if the exercise of the Option or the issuance of such shares of Common Stock would consti-tute a violation by Optionee or by the Company of any provision of any law or regulation of any governmental authority.

Section 14.      Withholding of Tax . To the extent that the exercise of this Option or the disposition of shares of Common Stock acquired by exercise of this Option results in compensation income to Optionee for federal or state income tax purposes, Optionee shall pay to the Company at the time of such exercise or disposition such amount of money as the Company may require to meet its obligation under applicable tax laws or regulations and, if Optionee fails to do so, the Company is authorized to withhold from any cash remuneration then or thereafter payable to Optionee, any tax required to be withheld by reason of such resulting compensation income or Company may otherwise refuse to issue or transfer any shares otherwise required to be issued or transferred pursuant to the terms hereof. Payment of the withholding tax by Optionee shall be made in accordance with Section 9(e) of the Plan.

Section 15.      No Right to Employment or Other Service . Nothing in the Plan or this Option Agreement shall confer upon Optionee any right to continue to serve the Company in the capacity in effect at the time the Optionee was granted or shall affect the right of the Company to terminate (a) the employment of Optionee with or without notice and with or without Cause or (b) any other service relationship between Optionee and the Company, as the case may be. The cause of any termination of employment or service shall be determined by the Administrator, and its determination shall be final.

Section 16.      Resolution of Disputes . As a condition of the granting of the Option hereby, Optionee and Optionee's heirs, personal representatives and successors agree that any dispute or disagreement which may arise hereunder shall be determined by the Administrator in its sole discretion and judgment, and that any such determi-nation and any inter-pretation by the





Administrator of the terms of this Option Agreement shall be final and shall be binding and conclusive, for all purposes, upon the Company, Optionee, and Optionee's heirs, personal representatives and successors.

Section 17.      Legends on Certificate . The certificates represent-ing the shares of Common Stock purchased by exercise of the Option will be stamped or otherwise imprinted with legends in such form as the Company or its counsel may require with respect to any applicable restrictions on sale or transfer and the stock transfer records of the Company will reflect stop‑transfer instruc-tions with respect to such shares.

Section 18.      Notices . Any notice required to be delivered to the Company under this Agreement shall be in writing and addressed to the Secretary of the Company at the Company's principal corporate offices. Any notice required to be delivered to Optionee under this Option Agreement shall be in writing and addressed to Optionee at Optionee's address as shown in the records of the Company. Either party may designate another address in writing (or by such other method approved by the Company) from time to time. The Company shall be under no obligation whatsoever to advise Optionee of the existence, maturity or termination of any of Optionee's rights here-under and Optionee shall be deemed to have fami-liarized himself or herself with all matters con-tained herein and in the Plan which may affect any of Optionee's rights or privileges hereunder.

Section 19.      Construction and Interpretation . Whenever the term "Optionee" is used herein under circumstances applicable to any other person or persons to whom this award, in accor-dance with the provisions of Section 6 hereof, may be transferred, the word "Optionee" shall be deemed to include such person or persons.

Section 20.      Agreement Subject to Plan . This Option Agreement is sub-ject to the Plan. The terms and provisions of the Plan (including any subsequent amend-ments thereto) are hereby incorporated herein by reference thereto. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. All defini-tions of words and terms contained in the Plan shall be applicable to this Option Agreement.

Section 21.      Successors and Assigns . The Company may assign any of its rights under this Option Agreement. This Option Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement will be binding upon Optionee and Optionee's beneficiaries, executors, administrators and the person(s) to whom the Option may be transferred by will or the laws of descent or distribution.

Section 22.      Severability . The invalidity or unenforceability of any provision of the Plan or this Option Agreement shall not affect the validity or enforceability of any other provision of the Plan or this Option Agreement, and each provision of the Plan and this Option Agreement shall be severable and enforceable to the extent permitted by law.

Section 23.      Discretionary Nature of Plan . The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its discretion. The grant of the Option in this Option Agreement does not create any contractual right or other right to receive any Options or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of Optionee's employment or other service with the Company.

Section 24.      Amendment . The Committee has the right to amend, alter, suspend, discontinue or cancel the Option, prospectively or retroactively; provided, that, no such amendment shall adversely affect Optionee's material rights under this Option Agreement without Optionee's consent.

Section 25.      No Impact on Other Benefits . The value of Optionee's Option is not part of his or her normal or expected compensation for purposes of calculating any severance, retirement, welfare, insurance or similar employee benefit.

Section 26.      Counterparts . This Option Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. Counterpart signature pages to this Option Agreement transmitted by facsimile transmission, by electronic mail in portable document format (.pdf), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing an original signature.

Section 27.      Acceptance . Optionee hereby acknowledges receipt of a copy of the Plan and this Option Agreement. Optionee has read and understands the terms and provisions thereof, and accepts the Option subject to all of the terms and conditions of the Plan and this Option Agreement. Optionee acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the underlying shares and that Optionee should consult a tax advisor prior to such exercise or disposition.






IN WITNESS WHEREOF, this Nonqualified Stock Option Agreement has been executed as of the ____ day of ___________, ______.

MEDICI VENTURES, INC.




By:    __________________________________

Name:
__________________________________

Title:    __________________________________


OPTIONEE



________________________________________






tZERO GROUP, INC.
2017 EQUITY INCENTIVE PLAN
Adopted December 24, 2017, as amended through March 15, 2019

SECTION 1. Purpose. The purpose of this tZERO Group, Inc. 2017 Equity Incentive Plan is to encourage ownership of Common Stock by eligible Employees, Directors and Consultants of the Company and to provide increased incentive for such Employees, Directors and Consultants to render services and to exert maximum effort for the business success of the Company. In addition, the Company expects that this Plan will further strengthen the identification of Employees, Directors and Consultants with the shareholders. Options to be granted under this Plan are not intended to qualify as incentive stock options pursuant to Section 422 of the Code.

SECTION 2. Definitions.

(a) Administrator means the Committee or the Board, as administrator of the Plan.
(b) Affiliate means, at the time of determination, any parent or subsidiary of the Company as such terms are defined in Rule 405. The Board will have the authority to determine the time or times at which parent or subsidiary status is determined within the foregoing definition .
(c) “ Applicable Laws means the requirements related to or implicated by the administration of the Plan under applicable state corporate law, United States federal and state securities laws, the Code and the applicable laws of any foreign country or jurisdiction where Awards are granted under the Plan.
(d) “ Award means a Nonqualified Stock Option, Restricted Stock Award or Restricted Stock Unit Award granted under the Plan.
(e) “ Award Agreement means a written agreement, contract, certificate or other instrument or document evidencing the terms and conditions of an individual Award granted under the Plan which may, in the discretion of the Company, be transmitted electronically to any Participant. Each Award Agreement shall be subject to the terms and conditions of the Plan.
(f) “ Board means the Board of Directors of the Company, as constituted at any time.
(g) “ Cause means, unless the applicable Award Agreement provides otherwise:
(i) If the Employee is a party to an employment or service agreement with the Company and such agreement provides for a definition of Cause, the definition contained therein; or
(ii) If no such agreement exists, or if such agreement does not define Cause: (A) failure to perform such duties as are reasonably requested by the Board; (B) material breach of any agreement with the Company, or a material violation of the Company’s code of conduct or other written policy; (C) commission of, or plea of guilty or no contest to, a felony or a crime involving moral turpitude or the commission of any other act involving willful malfeasance or material fiduciary breach with respect to the Company; (D) use of illegal drugs or abuse of alcohol that materially impairs the Participant’s ability to perform his or her duties to the Company; or (E) gross negligence or willful misconduct with respect to the Company.
(h) “ Change in Control means:
(i) Overstock.com, Inc., a Delaware corporation (“Overstock ), together with any entity or entities directly or indirectly controlled by Overstock, becomes the legal or beneficial owner of a number of shares of stock of the Company having less than a majority of the total voting power of the then outstanding stock of the Company; or
(ii) a Qualified IPO.
    
Notwithstanding anything herein to the contrary, and only to the extent that an Award is subject to Section 409A of the Code and payment of the Award pursuant to the application of the definition of “Change in Control above would cause such Award not to otherwise comply with Section 409A of the Code, payment of an Award may occur upon a “ Change in Control only to the extent that the event constitutes a “change in the ownership or effective control of the Company or a “ change in the ownership of a substantial portion of the assets of the Company under Section 409A of the Code and the applicable Internal Revenue Service and Treasury Department regulations thereunder.






(i) “ Code means the Internal Revenue Code of 1986, as it may be amended from time to time. Any reference to a section of the Code shall be deemed to include a reference to any regulations promulgated thereunder.
(j) “ Committee means a committee that may be appointed by the Board to administer the Plan in accordance with Section 3(d) and Section 3(e).
(k) “ Common Stock means the common stock of the Company.
(l) “ Company means tZERO Group Inc. a Delaware corporation, and any successor thereto.
(m) “ Consultant means any individual who is engaged by the Company to render consulting or advisory services for the Company, whether or not compensated for such services.
(n) “ Continuous Service means that the Participant’s service with the Company is not interrupted or terminated. If any Award is subject to Section 409A of the Code, the determination of Continuous Service shall be made in a manner consistent with Section 409A of the Code. The Administrator or its delegate, in its sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal or family leave of absence.
(o) “ Detrimental Activity means any of the following: (i) unauthorized disclosure of any confidential or proprietary information of the Company; (ii) any activity that would be grounds to terminate the Participant’s employment or service with the Company for cause; (iii) the breach of any non-competition, non-solicitation, non­ disparagement or other agreement containing restrictive covenants, with the Company; (iv) fraud or conduct contributing to any financial restatements or irregularities, as determined by the Administrator in its sole discretion; or (v) any other conduct or act determined to be materially injurious, detrimental or prejudicial to any interest of the Company, as determined by the Administrator in its sole discretion.
(p) “ Director means a member of the Board .
(q) “ Effective Date shall mean the date as of which this Plan is adopted by the Board.
(r) “ Employee means any person, including an officer, employed by, and providing direct services to, the Company.
(s) “ Fair Market Value means, on a given date, (i) if there is a public market for the shares of Common Stock on such date, the closing price of the shares as reported on such date on the principal national securities exchange on which the shares are listed or, if no sales of shares have been reported on any national securities exchange, then the immediately preceding date on which sales of the shares have been so reported or quoted, and (ii) if there is no public market for the shares of Common Stock on such date, then the fair market value shall be determined by the Administrator in good faith after taking into consideration all factors which it deems appropriate, including, without limitation, Section 409A of the Code, with the intention that Options granted under this Plan shall not constitute deferred compensation subject to Section 409A of the Code.
(t) “ Grant Date means the date on which the Administrator adopts a resolution, or takes other appropriate action, expressly granting an Award to a Participant that specifies the key terms and conditions of the Award or, if a later date is set forth in such resolution, then such date as is set forth in such resolution.
(u) “ Option means an option granted pursuant to the Plan that by its terms does not qualify or is not intended to qualify as an incentive stock option under Section 422 of the Code.
(v) “ Option Exercise Price means the price at which a share of Common Stock may be purchased upon the exercise of an Option.
(w) “ Participant means an eligible person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Award.
(x) “ Plan means this tZERO Group, Inc. 2017 Equity Incentive Plan, as amended and/or amended and restated from time to time.
(y) “ Qualified IPO means a firm commitment underwritten public offering of the Company’s common stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, with aggregate offering proceeds to the Company of not less than $20 million (net of underwriting discounts and commissions) and a listing of the Common Stock on a national securities exchange.
(z) “ Restricted Stock Award means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 7.
(aa) “ Restricted Stock Unit Award means a right to receive shares of Common Stock which is granted





pursuant to the terms and conditions of Section 8.

SECTION 3. Administration.
(a) Authority of Administrator . The Plan shall be administered by the Administrator, which shall be the Committee or, in the Board’s sole discretion, the Board. Subject to the terms of the Plan, the Committee’s charter and Applicable Laws, and in addition to other express powers and authorization conferred by the Plan, the Administrator shall have the authority:
(i) to construe and interpret the Plan and apply its provisions;
(ii) to promulgate, amend, and rescind rules and regulations relating to the administration of the Plan;
(iii) to authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan;
(iv) to delegate its authority to one or more officers of the Company;
(v) to determine when Awards are to be granted under the Plan and the applicable Grant Date;
(vi) from time to time to select, subject to the limitations set forth in this Plan, those Participants to whom Awards shall be granted;
(vii) to determine the number of shares of Common Stock to be made subject to each Award;
(viii) to prescribe the terms and conditions of each Award, including, without limitation, the medium of payment and vesting provisions, and to specify the provisions of the Award Agreement relating to such grant;
(ix) to amend any outstanding Awards, including for the purpose of modifying the time or manner of vesting, or the term of any outstanding Award; provided, however, that if any such amendment impairs a Participant’s rights or increases a Participant’s obligations under his or her Award or creates or increases a Participant’s federal income tax liability with respect to an Award, such amendment shall also be subject to the Participant’s consent;
(x) to determine the duration and purpose of leaves of absences which may be granted to a Participant without constituting termination of their employment for purposes of the Plan, which periods shall be no shorter than the periods generally applicable to Employees under the Company’s employment policies;
(xi) to make decisions with respect to outstanding Awards that may become necessary upon a change in corporate control or an event that triggers anti-­ dilution adjustments;
(xii) to interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan and any instrument or agreement relating to, or Award granted under, the Plan; and
(xiii) to exercise discretion to make any and all other determinations which it determines to be necessary or advisable for the administration of the Plan.

(b) Acquisitions and Other Transactions . The Administrator may, from time to time, assume outstanding awards granted by another entity, whether in connection with an acquisition of such other entity or otherwise, by either (i) granting an Award under the Plan in replacement of or in substitution for the award assumed by the Company, or (ii) treating the assumed award as if it had been granted under the Plan if the terms of such assumed award could be applied to an Award granted under the Plan. Such assumed award shall be permissible if the holder of the assumed award would have been eligible to be granted an Award hereunder if the other entity had applied the rules of this Plan to such grant. The Administrator may also grant Awards under the Plan in settlement of or in substitution for outstanding awards or obligations to grant future awards in connection with the Company or an affiliate acquiring another entity , an interest in another entity, or an additional interest in an affiliate whether by merger, stock purchase, asset purchase or other form of transaction.

(c) Administrator Decisions Final . All decisions made by the Administrator pursuant to the provisions of the Plan shall be final and binding on the Company and the Participants, unless such decisions are determined by a court having jurisdiction to be arbitrary and capricious.






(d) Delegation . The Administrator shall have the power to delegate to a subcommittee any of the administrative powers the Administrator is authorized to exercise (and references in this Plan to the Administrator shall thereafter be to the committee or subcommittee), subject, however , to such resolutions , not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. If a Committee serves as the Administrator, the Board may abolish such Committee at any time and revest in the Board the administration of the Plan. The members of any Committee designated as Administrator shall be appointed by and serve at the pleasure of the Board. From time to time, the Board may increase or decrease the size of the Committee, add additional members to, remove members (with or without cause) from, appoint new members in substitution therefor, and fill vacancies, however caused, in the Committee. The Board or Committee, as applicable, shall act pursuant to a vote of the majority of its members or, in the case of a Committee comprised of only two members , the unanimous consent of its members, whether present or not, or by the written consent of the majority of its members and minutes shall be kept of all of its meetings and copies thereof shall be provided to the Board . Subject to the limitations prescribed by the Plan and the Board, the Administrator may establish and follow such rules and regulations for the conduct of its business as it may determine to be advisable .

(e) Committee Composition . Except as otherwise determined by the Board, any Committee designated as Administrator shall consist solely of two or more members of the Board appointed to the Committee from time to time by the Board .

(f) Indemnification . In addition to such other rights of indemnification as they may have as members of the Board or the Committee, and to the extent allowed by Applicable Laws, the Administrator shall be indemnified by the Company against the reasonable expenses, including attorney’s fees, actually incurred in connection with any action, suit or proceeding or in connection with any appeal therein, to which the Administrator may be party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted under the Plan, and against all amounts paid by the Administrator in settlement thereof (provided, however, that the settlement has been approved by the Company , which approval shall not be unreasonably withheld) or paid by the Administrator in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that the Administrator did not act in good faith and in a manner which such person reasonably believed to be in the best interests of the Company, or in the case of a criminal proceeding, had no reason to believe that the conduct complained of was unlawful ; provided, however, that within 60 days after institution of any such action, suit or proceeding, the Administrator shall, in writing, offer the Company the opportunity at its own expense to handle and defend such action, suit or proceeding .

SECTION 4. Shares Subject to the Plan .
(a) Subject to adjustment in accordance with Section 12 , a total of 6,000,000 of the authorized shares of Common Stock shall be available for the grant of Awards under the Plan.
(b) Shares of Common Stock available for distribution under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares.
(c) Shares of Common Stock shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to the exercise or settlement of an Award. Any shares of Common Stock subject to an Award that is cashed-out, canceled, forfeited or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the Plan. Shares subject to an Award under the Plan shall again be made available for issuance or delivery under the Plan if such shares are shares tendered in payment of an Award or if such shares delivered or withheld by the Company to satisfy any tax withholding obligation .
(d) If the Administrator authorizes the assumption of awards pursuant to Section 3(b) or Section 13 hereof, the assumption will reduce the number of shares available for issuance under the Plan in the same manner as if the assumed awards had been granted under the Plan.
SECTION 5. Eligibility. Awards may be granted to Employees, Directors and Consultants. A Participant must be an Employee, Director or Consultant at the time the Award is granted. An Employee, Director or Consultant who has been granted an Award hereunder may be granted an additional Award or Awards, if the Administrator shall so determine.

SECTION 6. Option Provisions. Each Option granted under the Plan shall be evidenced by an Award Agreement. Each Option so granted shall be subject to the conditions set forth in this Section 6, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award Agreement. The Company shall have no liability to any Participant or any other person if an Option is determined to constitute “ nonqualified deferred compensation within the meaning of Section 409A





of the Code and the terms of such Option do not satisfy the requirements of Section 409A of the Code. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:
    
(a) Term . The term of an Option granted under the Plan shall be determined by the Administrator; provided, however, no Option shall be exercisable after the expiration of 15 years from the Grant Date.

(b) Option Exercise Price . Unless otherwise determined by the Administrator, the Option Exercise Price of each Option shall be not less than 100% of the Fair Market Value of the Common Stock subject to the Option on the Grant Date. Notwithstanding the foregoing, an Option may be granted with an Option Exercise Price lower than that set forth in the preceding sentence if such Option is granted in a manner satisfying the provisions of Section 409A of the Code or pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 409A of the Code.

(c) Method of Exercise . Options shall be exercised by the delivery by the Participant of written notice to the Secretary of the Company setting forth the number of shares of Common Stock with respect to which the Option is being exercised. The Option Exercise Price shall be paid, to the extent permitted by Applicable Laws, either (i) in cash or by certified or bank check at the time the Option is exercised or (ii) by any of the following means: (A) by delivery to the Company of other shares of Common Stock, duly endorsed for transfer to the Company, with a Fair Market Value on the date of delivery equal to the Option Exercise Price (or portion thereof) due for the number of shares being acquired; (B) by a “ net exercise procedure effected by withholding the minimum number of shares of Common Stock otherwise issuable in respect of an Option that are needed to pay the Option Exercise Price; (C) by any combination of the foregoing methods; or (D) in any other form of legal consideration that may be reasonably acceptable to the Administrator. Unless otherwise specifically provided in the Option, the Option Exercise Price that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of Common Stock that have been held for more than six months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes).

Notice may also be delivered by fax provided that the Option Exercise Price of such shares is received by the Company via wire transfer on the same day the fax transmission is received by the Company. The notice shall specify the address to which the certificates for such shares are to be mailed. An Option shall be deemed to have been exercised immediately prior to the close of business on the date (i) written notice of such exercise and (ii) payment in full of the Option Exercise Price for the number of shares for which Options are being exercised, are both received by the Company and the Participant shall be treated for all purposes as the record holder of such shares of Common Stock as of such date. As promptly as practicable after receipt of such written notice and payment, the Company shall deliver to the Participant certificates for the number of shares with respect to which such Option has been so exercised, issued in the Participant’s name or such other name as the Participant directs; provided, however, that such delivery shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited such certificates in the United States mail, addressed to the Participant at the address specified pursuant to this Section 6(c) .

(d) Transferability of an Option . An Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. Notwithstanding the foregoing, the Participant may, by delivering written notice to the Company , in a form satisfactory to the Company, designate a third party who, in the event of the death of the Participant, shall thereafter be entitled to exercise the Option.

(e) Vesting of Options . Each Option may, but need not , vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Administrator may deem appropriate . The vesting provisions of individual Options may vary . No Option may be exercised for a fraction of a share of Common Stock. The Administrator may, but shall not be required to, provide for an acceleration of vesting and exercisability in the terms of any Award Agreement upon the occurrence of a specified event.

(f) Termination of Continuous Service . Unless otherwise provided in an Award Agreement or in an employment agreement between a Participant and the Company, in the event a Participant’s Continuous Service terminates (other than upon the Participant’s death or disability), the Participant may exercise his or her Option (to the extent that the Participant was entitled to exercise such Option as of the date of termination) but only within such





period of time ending on the earlier of (i) the date that is three (3) years following the termination of the Participant’s Continuous Service or (ii) the expiration of the term of the Option as set forth in the Award Agreement; provided that, if the termination of Continuous Service is by the Company for Cause, all outstanding Options (whether or not vested) shall immediately terminate and cease to be exercisable. If, after termination, the Participant does not exercise his or her Option within the time specified in the Award Agreement, the Option shall terminate.

(g) Disability of Participant . Unless otherwise provided in an Award Agreement, in the event that a Participant’s Continuous Service terminates as a result of the Participant’s Disability, the Participant may exercise his or her Option (to the extent that the Participant was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination or (ii) the expiration of the term of the Option as set forth in the Award Agreement. If, after termination, the Participant does not exercise his or her Option within the time specified herein or in the Award Agreement, the Option shall terminate.

(h) Death of Participant . Unless otherwise provided in an Award Agreement, in the event a Participant’s Continuous Service terminates as a result of the Participant’s death, then the Option may be exercised (to the extent the Participant was entitled to exercise such Option as of the date of death) by the Participant’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Participant’s death, but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death or (ii) the expiration of the term of such Option as set forth in the Award Agreement. If, after the Participant’s death, the Option is not exercised within the time specified herein or in the Award Agreement, the Option shall terminate.

(i) Detrimental Activity . Unless otherwise provided in an Award Agreement, all outstanding Options (whether or not vested) shall immediately terminate and cease to be exercisable on the date on which a Participant engages in Detrimental Activity.

(u) No Rights as Shareholder . No Participant shall have any rights as a shareholder with respect to shares covered by an Option until the Option is exercised by written notice and accompanied by payment as provided in Section 6(c).

SECTION 7. Restricted Stock Awards. Each Award Agreement will be in such form and will contain such terms and conditions as the Board deems appropriate. To the extent consistent with the Company’s bylaws, at the Board’s election, shares of Common Stock may be (x) held in book entry form subject to the Company’s instructions until any restrictions relating to the Restricted Stock Award lapse; or (y) evidenced by a certificate, which certificate will be held in such form and manner as determined by the Board. The terms and conditions of Award Agreements may change from time to time, and the terms and conditions of separate Award Agreements need not be identical. Each Award Agreement will conform to (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(a) Consideration . A Restricted Stock Award may be awarded in consideration for (A) cash, check, bank draft, electronic funds, wire transfer or money order payable to the Company, (B) past services to the Company or an Affiliate or (C) any other form of legal consideration that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(b) Vesting . Shares of Common Stock awarded under the Restricted Stock Award may be subject to forfeiture to the Company in accordance with a vesting schedule (also referred to as a schedule for lapsing of the Company’s unvested share repurchase rights) to be determined by the Board.
(c) Termination of Participant’s Continuous Service . If a Participant’s Continuous Service terminates, the Company may receive through a forfeiture condition or a repurchase right any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination of Continuous Service under the terms of the Award Agreement.
(d) Transferability . The right to acquire shares of Common Stock under a Restricted Stock Award will not be transferable by the Participant. Once the shares of Common Stock are issued, the Board may allow the holder to transfer unvested shares, but only on the terms and conditions in the Award Agreement, and only so long as the Common Stock awarded under the Award Agreement remains subject to the terms of the Award Agreement in the hands of the recipient.
(e) Dividends . In the absence of an Award Agreement expressly providing otherwise, any dividends paid on Restricted Stock will be subject to the same vesting and forfeiture restrictions as apply to the shares subject to the Restricted Stock Award to which they relate.






SECTION 8. Restricted Stock Unit Awards. Each Award Agreement will be in such form and will contain such terms and conditions as the Board deems appropriate. The terms and conditions of Award Agreements may change from time to time, and the terms and conditions of separate Award Agreements need not be identical. Each Award Agreement will conform to (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(a) Consideration . At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant on delivery of each share of Common Stock subject to the Restricted Stock Unit Award . The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(b) Vesting . At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions on or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate .
(c) Payment . A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Award Agreement.
(d) Additional Restrictions . At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.
(e) Dividend Equivalents . Dividend equivalents may be credited on shares of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in Award Agreement. At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such manner as determined by the Board. Any additional shares covered by the Restricted Stock Unit Award credited by reason of such dividend equivalents will be subject to all of the same terms and conditions of the underlying Award Agreement to which they relate.
(f) Termination of Participant’s Continuous Service . Except as otherwise provided in the applicable Award Agreement, the unvested portion of the Restricted Stock Unit Award that has not vested will be forfeited on the Participant’s termination of Continuous Service.

SECTION 9. Securities Law Compliance.

(a) Securities Registration . No Awards shall be granted and no shares of Common Stock shall be issued and delivered under the Plan unless and until the Company and/or the Participant have complied with all applicable federal and state registration, listing and/or qualification requirements and all other requirements of law or of any regulatory agencies having jurisdiction.
(b) Representations; Legends . The Administrator may, as a condition to the grant of any Award and the issuance of any shares of Common Stock , require a Participant to (i) represent in writing that the shares of Common Stock received in connection with such Award are being acquired for investment and not with a view to distribution, and (ii) make such other representations and warranties as are deemed appropriate by counsel to the Company. Each certificate representing shares of Common Stock acquired under the Plan shall bear a legend in such form as the Company reasonably deems appropriate .

SECTION 10.      Use of Proceeds . Proceeds from the sale of Common Stock pursuant to Awards, or upon exercise thereof, shall constitute general funds of the Company.

SECTION 11.      Miscellaneous.

(a) Acceleration of Exercisability and Vesting . The Administrator shall have the power to accelerate the time at which an Award may first be exercised or the time during which an Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Award stating the time at which it may first be exercised or the time during which it will vest.

(b) Shareholder Rights . Except as provided in the Plan or an Award Agreement, no Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to an Award unless and until such Participant has satisfied all requirements for exercise or settlement of the





Award pursuant to its terms and no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions of other rights for which the record date is prior to the date such Common Stock certificate is issued, except as provided in Section 12 hereof.

(c) No Employment or Other Service Rights . Nothing in the Plan or any instrument executed or Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company in the capacity in effect at the time the Award was granted or shall affect the right of the Company to terminate (i) the employment of an Employee with or without notice and with or without Cause or (ii) the service of a Director pursuant to the By-laws of the Company, and any applicable provisions of the corporate law of the state in which the Company is incorporated, as the case may be . The cause of any termination of employment or service shall be determined by the Administrator, and its determination shall be final.

(d) Approved Leave of Absence . For purposes of the Plan, no termination of employment by an Employee shall be deemed to result from an approved leave of absence for military service or sickness , or for any other purpose approved by the Company, if the Employee’s right to reemployment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Administrator otherwise so provides in writing, in either case, except to the extent inconsistent with Section 409A of the Code if the applicable Award is subject thereto.

(e) Withholding Obligations . Subject to the discretion of the Administrator, a Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under an Award by any of the following means (in addition to the Company’s right to withhold from any amount paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Award, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company previously owned and unencumbered shares of Common Stock of the Company.

SECTION 12.      Adjustment Upon Changes in Stock. In the event of changes in the outstanding Common Stock or in the capital structure of the Company by reason of any stock or extraordinary cash dividend, stock split, reverse stock split, an extraordinary corporate transaction such as any recapitalization, reorganization, merger, consolidation, combination, exchange, or other relevant change in capitalization occurring after the Grant Date of any Award, Awards granted under the Plan and any Award Agreements, the exercise price of Options and the maximum number of shares of Common Stock subject to Awards stated in Section 4 will be equitably adjusted or substituted, as to the number, price or kind of a share of Common Stock or other consideration subject to such Awards to the extent necessary to preserve the economic intent of such Award. In the case of adjustments made pursuant to this Section 12, unless the Administrator reasonably determines that such adjustment is in the best interests of the Company, the Administrator shall ensure that any adjustments under this Section 12 will not constitute a modification of Options within the meaning of Section 409A of the Code. Except as hereinbefore expressly provided, (a) the issuance by the Company of shares of stock or any class of securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, (b) the payment of a dividend in property other than Common Stock, or (c) the occurrence of any similar transaction, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to Awards theretofore granted or the purchase price per share, unless the Administrator shall reasonably determine, in its sole discretion, that an adjustment is necessary to provide equitable treatment to Participants .
SECTION 13.      Effect of Change in Control.
(a) In the event of a Change in Control:
(i) the Administrator shall accelerate, vest or cause the restrictions to lapse with respect to all or any portion of any Award and the Award shall be deemed fully vested in accordance with the terms of the Plan as of immediately prior to the Change in Control; and
(ii) the Administrator may provide written notice to Participants that for a period as determined by the Administrator prior to the Change in Control, after accounting for the actions outlined in Section 1l(a)(i), such Awards shall be exercisable, to the extent applicable , as to all shares of Common Stock subject thereto





and upon the occurrence of the Change in Control, any Awards not so exercised shall terminate and be of no further force and effect.
(b) The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company and its affiliates, taken as a whole.
SECTION 14.      Amendment of the Plan and Awards .
(a) Amendment of the Plan . The Board at any time, and from time to time, may amend or terminate the Plan. However, except as provided in Section 12 relating to adjustments upon changes in Common Stock and Section 14(c), no amendment shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary to satisfy any Applicable Laws. At the time of such amendment, the Board shall determine, upon advice from counsel, whether such amendment will be contingent on shareholder approval.
(b) Shareholder Approval . The Board may, in its sole discretion, submit any other amendment to the Plan for shareholder approval.
(c) Contemplated Amendments . It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to the nonqualified deferred compensation provisions of Section 409A of the Code and/or to bring the Plan and/or Awards granted under it into compliance therewith.
(d) No Impairment of Rights . Rights under any Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing.
(e) Amendment of Awards . The Administrator at any time, and from time to time, may amend the terms of any one or more Awards; provided, however, that the Administrator may not affect any amendment which would otherwise constitute an impairment of the rights under any Award unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing .

SECTION 15.      General Provisions.

(a) Clawback; Forfeiture . Notwithstanding any other provisions in this Plan, the Administrator may, in its sole discretion, provide in an Award Agreement or otherwise that the Administrator may cancel such Award if the Participant has engaged in or engages in any Detrimental Activity . The Administrator may, in its sole discretion, also provide in an Award Agreement or otherwise that (i) if the Participant has engaged in or engages in Detrimental Activity, the Participant will forfeit any gain realized on the vesting or settlement of any Award , and must repay the gain to the Company and (ii) if the Participant receives any amount in excess of what the Participant should have received under the terms of the Award for any reason (including, without limitation, by reason of a financial restatement, mistake in calculations or other administrative error) , then the Participant shall be required to repay any such excess amount to the Company . Without limiting the foregoing, all Awards shall be subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply with Applicable Laws, government regulation or stock exchange listing requirement (or any policy adopted by the Company pursuant to any such law, government regulation or stock exchange listing requirement).

(b) Sub-plans . The Administrator may from time to time establish sub-plans under the Plan for purposes of satisfying blue sky, securities, tax or other laws of various jurisdictions in which the Company intends to grant Awards. Any sub-plans shall contain such limitations and other terms and conditions as the Administrator determines are necessary or desirable. All sub-plans shall be deemed a part of the Plan, but each sub-plan shall apply only to the Participants in the jurisdiction for which the sub-plan was designed.

(c) Unfunded Plan . The Plan shall be unfunded. Neither the Company, the Board nor the Administrator shall be required to establish any special or separate fund or to segregate any assets to assure the performance of its obligations under the Plan.






(d) Recapitalizations . Each Award Agreement shall contain provisions required to reflect the provisions of Section 12.

(e) Delivery . Upon settlement of an Award granted under this Plan, the Company shall issue Common Stock or pay any amounts due within a reasonable period of time thereafter. Subject to any statutory or regulatory obligations the Company may otherwise have, for purposes of this Plan, 30 days shall be considered a reasonable period of time.

(f) No Fractional Shares . No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan. The Administrator shall determine whether cash, additional Awards or other securities or property shall be issued or paid in lieu of fractional shares of Common Stock or whether any fractional shares should be rounded, forfeited or otherwise eliminated.

(g) Other Provisions . The Award Agreements authorized under the Plan may contain such other provisions not inconsistent with this Plan, including, without limitation, restrictions upon the exercise of the Awards, as the Administrator may deem advisable.

(h) Section 409A . Unless otherwise expressly provided for in an Award Agreement, the Plan and Award Agreements will be interpreted to the greatest extent possible in a manner that makes the Plan and the Awards granted hereunder exempt from Section 409A of the Code, and, to the extent not so exempt, in compliance with Section 409A of the Code. Any payments described in the Plan that are due within the “short-term deferral period as defined in Section 409A of the Code shall not be treated as deferred compensation unless Applicable Laws require otherwise. Notwithstanding anything to the contrary in the Plan, to the extent required to avoid accelerated taxation and tax penalties under Section 409A of the Code, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Plan during the six (6) month period immediately following a Participant’s termination of Continuous Service shall instead be paid on the first payroll date after the six-month anniversary of the Participant’s separation from service (or the Participant’s death, if earlier). Notwithstanding the foregoing, neither the Company nor the Administrator shall have any obligation to take any action to prevent the assessment of any additional tax or penalty on any Participant under Section 409A of the Code and neither the Company nor the Administrator will have any liability to any Participant for such tax or penalty.

(i) Right of Repurchase . An Award may include a provision whereby the Company may elect to repurchase all or any part of the shares of Common Stock acquired by the Participant. The terms of any repurchase option shall be specified in the Award Agreement. Unless otherwise determined by the Board and subject to compliance with applicable laws, the repurchase price for vested shares of Common Stock will be the Fair Market Value of the shares of Common Stock on the date of repurchase and the repurchase price for unvested shares of Common Stock will be the lower of (i) the Fair Market Value of the shares of Common Stock on the date of repurchase or (ii) their original purchase price. The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time necessary to avoid classification of the Award as a liability for financial accounting purposes) have elapsed following delivery of shares of Common Stock subject to the Award , unless otherwise specifically provided by the Board. The Board reserves the right to assign the Company’s right of repurchase.

(j) Right of First Refusal . An Award may also include a provision whereby the Company may elect to exercise a right of first refusal following receipt of notice from the Participant of the intent to transfer all or any part of the shares of Common Stock received under the Award. Except as expressly provided in this paragraph or in the Award Agreement, such right of first refusal shall otherwise comply with any applicable provisions of the bylaws of the Company. The Board reserves the right to assign the Company’s right of first refusal.

(k) Beneficiary Designation . Each Participant under the Plan may from time to time name any beneficiary or beneficiaries by whom any right under the Plan is to be exercised in case of such Participant’s death . Each designation will revoke all prior designations by the same Participant , shall be in a form reasonably prescribed by the Administrator and shall be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime.

(l) Expenses . The costs of administering the Plan shall be paid by the Company .

(m) Severability . If any of the provisions of the Plan or any Award Agreement is held to be invalid , illegal or unenforceable, whether in whole or in part, such provision shall be deemed modified to the extent, but only to the





extent, of such invalidity, illegality or unenforceability and the remaining provisions shall not be affected thereby.

(n) Plan Headings . The headings in the Plan are for purposes of convenience only and are not intended to define or limit the construction of the provisions hereof .

(o) Non-Uniform Treatment . The Administrator’s determinations under the Plan need not be uniform and may be made by it selectively among persons who are eligible to receive, or actually receive, Awards . Without limiting the generality of the foregoing, the Administrator shall be entitled to make non-uniform and selective determinations, amendments and adjustments, and to enter into non-uniform and selective Award Agreements.

SECTION 16.      Termination or Suspension of the Plan. The Plan shall terminate automatically on the date that is ten (10) years after the Effective Date. No Award shall be granted pursuant to the Plan after such date, but Awards theretofore granted may extend beyond that date. The Board may suspend or terminate the Plan at any earlier date pursuant to Section 14(a) hereof. No Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

SECTION 17.      Liability of Company. The Company and any affiliate which is in existence or hereafter comes into existence shall not be liable to a Participant or other persons as to:

(a) The non-issuance or sale of shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any shares hereunder; and

(b) Any tax consequence expected, but not realized, by any Participant or other person due to the exercise or settlement of any Award granted hereunder.

SECTION 18.      Choice of Law. The law of the State of New York shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state’s conflict of law rules.

As adopted by the Board of Directors of the Company on December 24, 2017, as amended on May 21, 2018 and June 7, 2018.






tZERO GROUP, INC.
NOTICE OF STOCK OPTION GRANT
tZERO Group, Inc. (the “Company”), under its 2017 Equity Incentive Plan (the “Plan”), hereby grants to Optionee an option (the “Option”) to purchase the number of shares of Common Stock set forth below. The Option is subject to all of the terms and conditions as set forth in this notice (the “Grant Notice”), in the Option Agreement and in the Plan, both of which are incorporated herein in their entirety. Capitalized terms not explicitly defined herein but defined in the Plan or the Option Agreement will have the same definitions as in the Plan or the Option Agreement. If there is any conflict between the terms in the Option Agreement and the Plan, the terms of the Plan will control.
Optionee:
 
Type of Grant:
Nonstatutory Stock Option
Date of Grant:
 
Vesting Commencement Date:
 
Number of Shares Subject to Option:
 
Option Exercise Price (Per Share):
 
Total Exercise Price:
 
Expiration Date:
 

Vesting Schedule :The Option will vest over a three-year period with the first vesting date to occur on the Vesting Commencement Date. Subject to the Optionee’s Continuous Service on each vesting date, this Option will vest as to 1/3 of the total number of shares of Common Stock subject to the Option on each of the Vesting Commencement Date, the first anniversary of the Vesting Commencement Date and the second anniversary of the Vesting Commencement Date. Any fractional shares will be allocated to the first vesting tranche.
Additional Terms/Acknowledgements : Optionee acknowledges receipt of, and understands and agrees to, this Grant Notice, the Option Agreement and the Plan. If applicable, Optionee acknowledges that he or she has been made aware of the Company’s Rule 701(e) Information Statement (the “Information Statement”) for the Plan, and the Company encourages Optionee to review the Information Statement before exercising this Option. Optionee acknowledges and agrees that if Optionee exercises the Option without first reviewing the Information Statement (as drafted at such future date), Optionee is knowingly and voluntarily declining to review the Information Statement. As of the Date of Grant, this Grant Notice, the Option Agreement and the Plan set forth the entire understanding between Optionee and the Company regarding the Option and supersede all prior oral and written agreements with respect to the Option. By accepting the Option, Optionee consents to receive documents governing the Option by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company from time to time.
[Signature page follows]













tZERO GROUP, Inc.
Optionee:
 
 
By: ________________________________
Signature
By: ____________________________________
Signature
Name: ______________________________
Name: __________________________________
Title: ______________________________
Date: __________________________________
Date: ______________________________
 






tZERO GROUP, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
Pursuant to the Notice of Stock Option Grant (the “Grant Notice”) and this Nonqualified Stock Option Agreement (this “Option Agreement”), tZERO Group, Inc., a Delaware corporation (the “Company”) has granted Optionee (as defined in the Grant Notice) an option (the “Option”) under its 2017 Equity Incentive Plan (the “Plan”).
Section 1. Introduction . The Company has previously adopted the Plan for the purpose of providing eligible Employees, Directors and Consultants (as defined in the Plan) with increased incentive to render services, to exert maximum effort for the business success of the Company and to strengthen the identification of such individuals with the shareholders. The Company, acting through the Administrator (as defined in the Plan), has determined that its interests will be advanced by the issuance to Optionee of an Option under the Plan.

Section 2. Option . Subject to the terms and conditions contained herein, including Exhibit A, the Company hereby irrevocably grants to Optionee the Option to purchase from the Company the number of shares of the Company’s common stock, $0.01 par value (“Common Stock”) set forth in the Grant Notice at the Option Exercise Price set forth in the Grant Notice.

Section 3. Vesting . The Option will vest as provided in the Grant Notice. Vesting will cease at the time the Optionee ceases to be in Continuous Service. Any portion of the Option that has not yet vested will be forfeited at the time the Optionee ceases to be in Continuous Service. Notwithstanding anything in this Option Agreement to the contrary, the Administrator, in its sole discretion, may waive the foregoing schedule of vesting and upon written notice to Optionee, accelerate the earliest date or dates on which any of the Options granted hereunder are exercisable.

Section 4. Procedure for Exercise . The Option herein granted may be exercised by the delivery by Optionee of written notice to the Secretary of the Company setting forth the number of shares of Common Stock with respect to which the Option is being exer-cised. The Option Exercise Price shall be paid, to the extent permitted by Applicable Laws, either (a) in cash or by certified or bank check at the time the Option is exercised or (b) by any of the following means: (i) by delivery to the Company of shares of Common Stock, duly endorsed for transfer to the Company, with a Fair Market Value on the date of delivery equal to the Option Exercise Price (or portion thereof) due for the number of shares being acquired; (ii) by a “net exercise” procedure effected by withholding the minimum number of shares of Common Stock otherwise issuable in respect of the Option that are needed to pay the Option Exercise Price; (iii) by any combination of the foregoing methods; or (iv) in any other form of legal consideration that may be reasonably acceptable to the Administrator. If the Option Exercise Price is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, it shall be paid only by shares of Common Stock that have been held for more than six months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). Notice may also be delivered by fax provided that the Option Exercise Price of such shares is received by the Company via wire transfer on the same day the fax transmission is received by the Company. The notice shall specify the address to which the certificates for such shares are to be mailed. This Option shall be deemed to have been exercised immediately prior to the close of business on the date (i) written notice of such exercise and (ii) payment in full of the exercise price for the number of share for which Options are being exercised, are both received by the Company and Optionee shall be treated for all purposes as the record holder of such shares of Common Stock as of such date.

As promptly as practic-able after receipt of such written notice and payment, the Company shall deliver to Optionee certificates for the number of shares with respect to which such Option has been so exercised, issued in Optionee’s name or such other name as Optionee directs; provided, however, that such delivery shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited such certifi-cates in the United States mail, addressed to Optionee at the address specified pursuant to this Section 4.
Section 5. Termination of Continuous Service . In the event Optionee’s Continuous Service terminates, Optionee may exercise the Option (to the extent that Optionee was entitled to exercise the Option as of the date of termination) during a three (3) month period after the date of termination (after which period the Option shall expire), but in no event may the Option be exercised after the Expiration Date set forth in the Grant Notice; provided that, if the termination of Continuous Service is by the Company for Cause, the entire Option (whether or not vested) shall immediately terminate and cease to be exercisable. If, after termination, Optionee does not exercise the Option before the Expiration Date set forth in the Grant Notice, the Option shall terminate.

Section 6. Company’s Right of First Refusal . Before any shares of Common Stock subject to the Option (the “Shares”) held by the Optionee or any transferee (either being sometimes referred to herein as the “Holder”) may be sold or





otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 6 (the “Right of First Refusal”).

(a) Notice of Proposed Transfer . The Holder of the Shares shall deliver to the Company a written notice (the “Notice”) stating: (i) the Holder’s bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee (“Proposed Transferee”); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the “Offered Price”), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s).

(b) Exercise of Right of First Refusal . At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below.

(c) Purchase Price . The purchase price (“Purchase Price”) for the Shares purchased by the Company or its assignee(s) under this Section 6 shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non­cash consideration shall be determined by the Board of Directors of the Company in good faith.

(d) Payment . Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within thirty (30) days after receipt of the Notice or in the manner and at the times set forth in the Notice.

(e) Holder’s Right to Transfer . If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section 6, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within one hundred and twenty (120) days after the date of the Notice, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section 6 shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred.

(f) Exception for Certain Family Transfers . Anything to the contrary contained in this Section 6 notwithstanding, the transfer of any or all of the Shares during the Optionee’s lifetime or on the Optionee’s death by will or intestacy to the Optionee’s immediate family or a trust for the benefit of the Optionee’s immediate family shall be exempt from the provisions of this Section 6. “Immediate Family” as used herein shall mean spouse (or domestic partner, as defined below), lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section 6, and there shall be no further transfer of such Shares except in accordance with the terms of this Section 6. As used herein, a person will be deemed to be a “domestic partner” of another person if the two persons (1) reside in the same residence and plan to do so indefinitely, (2) have resided together for at least one year, (3) are each at least 18 years of age and mentally competent to consent to contract, (4) are not blood relatives any closer than would prohibit legal marriage in the state in which they reside, and (5) have each been the sole spouse equivalent of the other for the year prior to the transfer and plan to remain so indefinitely; provided that a person will not be considered a domestic partner if he or she is married to another person or has any other spouse equivalent.

(g) Termination of Right of First Refusal . The Right of First Refusal shall terminate as to any Shares upon the earlier of (i) the first sale of Common Stock of the Company to the general public, or (ii) a Change in Control in which the successor corporation has equity securities that are publicly traded.

Section 7. Transferability . This Option shall not be trans-fer-able by Optionee otherwise than by Optionee’s will or by the laws of descent and distribution. During the lifetime of Optionee, the Option shall be exercisable only by Optionee or his authorized legal representative. Any heir or legatee of Optionee shall take rights herein granted subject to the terms and conditions hereof. No such trans-fer of this Option Agreement to heirs or legatees of Optionee shall be effec-tive to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of such evidence as the Administrator may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions here-of.





Section 8. No Rights as Shareholder . Optionee shall have no rights as a shareholder with respect to any shares of Common Stock covered by this Option Agreement until the Option is exercised by written notice and accompanied by payment as provided in Section 4 of this Option Agreement.

Section 9. Adjustments . The shares of Common Stock subject to the Option may be adjusted or terminated in any manner as contemplated by Section 10 of the Plan.

Section 10. Change in Control . In the event of a Change in Control, the provisions of Section 13 of the Plan shall apply.

Section 11. Restrictive Covenants . By accepting this Option, Optionee acknowledges that Optionee will be subject to the restrictive covenants set forth on Exhibit A , attached hereto.

Section 12. Shareholders’ Agreement . Optionee acknowledges that, in connection with the grant, vesting and/or exercise of this Option, the Administrator may require Optionee to execute and become a party to the Shareholders’ Agreement as a condition of such grant, vesting and/or exercise.

Section 13. Compliance With Securities Laws . Upon the acqui-si-tion of any shares pursuant to the exercise of the Option herein granted, Optionee (or any person acting under Section 6) will enter into such written representations, warranties and agreements as the Company may reasonably request in order to comply with applicable securities laws or with this Option Agreement.

Section 14. Compliance With Laws . Notwithstanding any of the other provisions here-of, Optionee agrees that he or she will not exercise the Option granted hereby, and that the Company will not be obligated to issue any shares pursuant to this Option Agreement, if the exercise of the Option or the issuance of such shares of Common Stock would consti-tute a violation by Optionee or by the Company of any provision of any law or regulation of any governmental authority. The parties agree to work together in good faith to resolve any potential violation referenced in this Section 14.

Section 15. Withholding of Tax . To the extent that the exercise of this Option or the disposition of shares of Common Stock acquired by exercise of this Option results in an amount paid to the Optionee which results in income to Optionee for federal or state income tax purposes, Optionee shall pay to the Company at the time of such exercise or disposition such amount of money as the Company may require to meet its obligation under applicable tax laws or regulations and, if Optionee fails to do so, the Company is authorized to withhold from any cash remuneration then or thereafter payable to Optionee, any tax required to be withheld by reason of such resulting compensation income or Company may otherwise refuse to issue or transfer any shares otherwise required to be issued or transferred pursuant to the terms hereof. Payment of the withholding tax by Optionee shall be made in accordance with Section 9(e) of the Plan.

Section 16. No Right to Employment or Other Service . Nothing in the Plan or this Option Agreement shall confer upon Optionee any right to continue to serve the Company in the capacity in effect at the time the Optionee was granted or shall affect the right of the Company to terminate (a) the employment of Optionee with or without notice and with or without Cause or (b) any other service relationship between Optionee and the Company, as the case may be. If there is a dispute as to “Cause”, the definitive Cause of any termination of employment or service shall be determined by a mutually agreed upon third-party arbiter or a final decision entered in a court of competent jurisdiction.

Section 17. Resolution of Disputes . As a condition of the granting of the Option hereby, Optionee and Optionee’s heirs, personal representatives and successors agree that any dispute or disagreement which may arise hereunder shall be determined by a mutually agreed upon third-party arbiter or a final decision entered in a court of competent jurisdiction.

Section 18. Legends on Certificate . The certificates represent-ing the shares of Common Stock purchased by exercise of the Option will be stamped or otherwise imprinted with legends in such form as the Company or its counsel may require with respect to any applicable restrictions on sale or transfer and the stock transfer records of the Company will reflect stop‑transfer instruc-tions with respect to such shares.

Section 19. Notices . Any notice required to be delivered to the Company under this Agreement shall be in writing and addressed to the CEO of the Company at the Company’s principal corporate offices. Any notice required to be delivered to Optionee under this Option Agreement shall be in writing and addressed to Optionee at Optionee’s address as shown in the records of the Company. Either party may designate another address in writing (or by such other method approved by the Company) from time to time. The Company shall be under no obligation whatsoever to advise Optionee of the existence, maturity or termination





of any of Optionee’s rights here-under and Optionee shall be deemed to have fami-liarized himself or herself with all matters con-tained herein and in the Plan which may affect any of Optionee’s rights or privileges hereunder.

Section 20. Construction and Interpretation . Whenever the term “Optionee” is used herein under circumstances applicable to any other person or persons to whom this award, in accor-dance with the provisions of Section 7 hereof, may be transferred, the word “Optionee” shall be deemed to include such person or persons.

Section 21. Agreement Subject to Plan . This Option Agreement is sub-ject to the Plan. The terms and provisions of the Plan (including any subsequent amend-ments thereto) are hereby incorporated herein by reference thereto. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. All defini-tions of words and terms contained in the Plan shall be applicable to this Option Agreement. Notwithstanding anything in this Option Agreement to the contrary, if any subsequent amendment impairs the Optionee’s rights or increases the Optionee’s obligations under his or her Award or creates or increases a Participant’s federal income tax liability with respect to an Award, such amendment shall also be subject to the Participant’s consent.

Section 22. Successors and Assigns . The Company may assign any of its rights under this Option Agreement. This Option Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement will be binding upon Optionee and Optionee’s beneficiaries, executors, administrators and the person(s) to whom the Option may be transferred by will or the laws of descent or distribution.

Section 23. Severability . The invalidity or unenforceability of any provision of the Plan or this Option Agreement shall not affect the validity or enforceability of any other provision of the Plan or this Option Agreement, and each provision of the Plan and this Option Agreement shall be severable and enforceable to the extent permitted by law.

Section 24. Discretionary Nature of Plan . The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its reasonable discretion. The grant of the Option in this Option Agreement does not create any contractual right to receive any Options or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of Optionee’s employment or other service with the Company. Notwithstanding anything in this Option Agreement to the contrary, if any subsequent amendment, cancellation, or termination of the Plan impairs the Optionee’s rights or increases the Optionee’s obligations under his or her Award or creates or increases a Participant’s federal income tax liability with respect to an Award, such amendment, modification or termination shall also be subject to the Participant’s consent.

Section 25. Amendment . The Committee has the right to amend, alter, suspend, discontinue or cancel the Option, prospectively or retroactively; provided, that, no such amendment shall adversely affect Optionee’s material rights under this Option Agreement without Optionee’s consent.

Section 26. No Impact on Other Benefits . The value of Optionee’s Option is not part of his or her normal or expected compensation for purposes of calculating any severance, retirement, welfare, insurance or similar employee benefit.

Section 27. Counterparts . This Option Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. Counterpart signature pages to this Option Agreement transmitted by facsimile transmission, by electronic mail in portable document format (.pdf), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing an original signature.

Section 28. Acceptance . Optionee hereby acknowledges receipt of a copy of the Plan and this Option Agreement. Optionee has read and understands the terms and provisions thereof, and accepts the Option subject to all of the terms and conditions of the Plan and this Option Agreement. Optionee acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the underlying shares and that Optionee should consult a tax advisor prior to such exercise or disposition.






EXHIBIT A - APPLICABLE RESTRICTIVE COVENANTS
In consideration for Optionee agreeing to the following restrictions, the Company agrees to provide Optionee with the Stock Units pursuant to this Agreement, as well as one or more of the following: initial or continued employment with the Company; portions of the Company’s confidential, proprietary and trade secret information; the ability to develop relationships with the Company’s potential and existing suppliers, financing sources, customers and employees; and specialized training in, and knowledge of, the business group the Optionee is employed with.
1. At all times during Optionee’s employment with the Company, and for the applicable Protected Period (as defined below) following the termination of Optionee’s employment by the Company for “Cause” (as defined in the Plan), Optionee shall be bound by the Noncompete Obligation (defined below).

2. In the event Optionee voluntarily terminates his/her employment for any reason or where the Company terminates Optionee’s employment without Cause, the Company may elect, in its sole and absolute discretion upon notice to Optionee, to require that Optionee be bound by the Noncompete Obligation during the applicable Protected Period and to provide Optionee with continuation of Optionee’s salary in accordance with the Company’s standard payroll practice during the Protected Period (the “Restrictive Covenant Benefit”). In the event Optionee does not receive a salary from the Company, Optionee shall receive an amount, as determined by the Company in its sole and absolute discretion, based on Optionee’s corporate title with the Company or its Affiliates.

The receipt of the Restrictive Covenant Benefit is conditioned upon the execution of a general waiver and release agreement in a form agreeable to the Company that becomes effective and irrevocable no later than 30 days following the Optionee’s termination of employment. For the avoidance of doubt, the Optionee has no legally binding right to the Restrictive Covenant Benefit unless and until the Company elects, in its sole and absolute discretion, to require that Optionee be bound by the Noncompete Obligation.
3. In the event that Optionee voluntarily terminates employment with the Company or the Company terminates Optionee’s employment without Cause, and the Company does not elect to provide the Restrictive Covenant Benefit to Optionee under Paragraph (2) above, Optionee shall not be bound by the Noncompete Obligation. If Optionee voluntarily terminates employment with the Company or the Company terminates Optionee’s employment without Cause and the Company elects to provide the Restrictive Covenant Benefit for a period of less than the Protected Period, Optionee shall be bound by the Noncompete Obligation only for the period that the Company is paying, or that the Optionee is receiving, the Restrictive Covenant Benefit.

4. The Company may elect, in its sole and absolute discretion, to provide notice to Optionee prior to a termination without Cause (instead of offering the Restrictive Covenant Benefit under Paragraph (2) above), the amount of said notice to be equal to the otherwise applicable Protected Period. During this notice period, Optionee will remain an employee of the Company and will assist in transitioning the business relationships with customers and other business contacts with which Optionee has had material involvement as requested by the Company and as needed to help the Company retain such business relationships. However, Optionee acknowledges and agrees that the Company can remove Optionee from active service during this notice period at its discretion but that doing so will not eliminate Optionee’s duty to remain loyal to the Company while on the Company’s payroll and to otherwise comply with the restrictions in this Agreement. The Company reserves the right at its sole and absolute discretion to require Optionee not to carry out Optionee’s duties or to carry out limited duties for the Company prior to the termination date. During the notice period, the Company shall be under no obligation to provide any work to, or vest any powers in, Optionee and Optionee shall have no right to perform any services for the Company. During the notice period, the Company shall be entitled at its sole and absolute discretion: (i) to require Optionee not to attend Optionee’s place of work or any other premises of the Company; and (ii) to require Optionee to work from Optionee’s home. During the notice period, Optionee shall continue to receive Optionee’s salary and all contractual benefits in the usual way and shall remain an employee of the Company with all associated duties under the common law.

5. Optionee further agrees that for one (1) year following the termination of Optionee’s employment by either Optionee or the Company for any reason or no reason, Optionee will not, without the prior written consent of the Company, directly or indirectly (i) solicit, encourage, or induce any employee of the Company to terminate his or her employment with the Company; or (ii) hire or employ any person who is or was an employee or consultant of the Company.

6. Optionee further agrees that for the Protected Period and thirty (30) days thereafter, upon the termination of Optionee’s employment by either Optionee or the Company for any reason or no reason, Optionee will not, without the prior written consent of the Company, directly or indirectly: (i) solicit any customer, supplier or vendor of the Company with which or with whom Optionee was involved as part of Optionee’s job responsibilities during Optionee’s employment with the Company (other than any such customer with which or with whom Optionee conducted business prior to commencement of his/her employment with





the Company) or regarding which or whom Optionee learned Confidential Information during Optionee’s employment with the Company to obtain a Conflicting Product or Service from a Competing Business; or (ii) encourage or induce any customer, supplier or vendor of the Company not to do business with the Company or to reduce the amount of business it is doing or might do in the future with the Company or its affiliated entities. Optionee and the Company agree this restriction is inherently reasonable because it is limited to the places or locations where the customer is doing business at the time.

7. Optionee further acknowledges and agrees that the protective covenants herein are material and important terms of this Agreement, and Optionee further agrees that should all or any part or application of Paragraphs (1), (2), (4), (5) or (6) of this Exhibit A be held or found invalid or unenforceable for any reason whatsoever by a court or arbitrator of competent jurisdiction in an action between Optionee and the Company (despite, and after application of, any applicable rights to reformation that could add or renew enforceability), or if the Optionee breaches the obligations of this Exhibit A, the Company shall be entitled to receive from Optionee a return of the Stock Options and Restrictive Covenant Benefit (if applicable) and the Optionee shall forfeit any remaining portion of the Restrictive Covenant Benefit that has not been paid or distributed to the Optionee. If Optionee has sold, transferred, or otherwise disposed of the Stock Options, the Company shall be entitled to receive from Optionee the profits (if any) derived by Optionee by virtue of such sale, transfer, or other disposition.

8. Optionee agrees not to engage in any unauthorized use or disclosure of the Company’s Confidential Information, customer relationships, or specialized training. Optionee agrees to use the Company’s Confidential Information and other benefits of Optionee’s employment to further the business interests of the Company. Optionee agrees to preserve records on current and prospective Company customers, suppliers, and other business relationships that Optionee develops or helps to develop, and not use these records in any way, directly or indirectly, to harm the Company’s business. Optionee agrees not to use the Company’s Confidential Information or any document or record concerning the business and affairs of the Company (“Company Record”) for any purpose without the prior written authorization of an officer of the Company, except that Optionee may use Confidential Information and Company Records to perform Optionee’s duties. These restrictions on use or disclosure of Confidential Information will only apply for three (3) years after the end of Optionee’s employment where information that does not qualify as a trade secret is concerned; however, the restrictions will continue to apply to trade secret information for as long as the information at issue remains qualified as a trade secret.

9. As used herein, the following terms shall have the meaning ascribed to them:

(a) “Protected Period” shall mean:

(i) For Officers, Directors and Consultants: six (6) months;

(ii) For other Employees: four (4) months;

(b) ‘‘Noncompete Obligation” means that Optionee will not, directly or indirectly, provide services to a Competing Business that are identical or similar to those Optionee performed for the Company or which serve the same or similar function or purpose or which are otherwise likely to result in the disclosure of Confidential Information.

(c) “Competing Business” means any person or entity engaged in the business of providing a Conflicting Product or Service that is identical or similar to those that Optionee performed for the Company.

(d) “Conflicting Product or Service” means a product and/or service that is the same or similar in function or purpose to a Company product and/or service, such that it would replace or compete with: a product and/or service the Company provides to its customers; or a product or service that is under development or planning by the Company but not yet provided to customers and regarding which Optionee was provided Confidential Information in the course of his/her employment.

(e) “Confidential Information” refers to the Company’s trade secrets and any other legally protectable information that is maintained as confidential by the Company and that is not authorized for disclosure to the public.

10. If a court or arbitrator finds a restriction herein to be unenforceable as written, such court or arbitrator (for the jurisdiction covered by that court or the matter before that arbitrator only) will revise the restriction so as to make it enforceable to protect the Company’s legitimate business interests. If one or more of the provisions of this Agreement are deemed void by law, then the remaining provisions will continue in full force and effect.

11. Notwithstanding any provision of the Plan or this Agreement to the contrary, the validity and construction of the provisions of this Exhibit A will be governed by the laws of the State of New York, without regard to the conflicts of law principles thereof. The Optionee expressly agrees that the provisions of the Plan, apply with full force and effect to this Exhibit A.




Exhibit 21

Subsidiaries of the Registrant
Name
Jurisdiction of Formation
 
Trade Names
Overstock.com Services, Inc.
Utah
 
Overstock.com Services
Market Partner Holdings, Inc.
Utah
 
 
Market Partner Operations, Inc.
Utah
 
 
Market Partner SR, Inc.
Utah
 
 
Market Partner WM, Inc.
Utah
 
 
Market Partner BC, Inc.
Utah
 
 
Market Partner EB, Inc.
Utah
 
 
Market Partner NE, Inc.
Utah
 
 
Supplier Oasis Fulfillment Services, Inc.
Utah
 
SOFS
Overstock Ireland Limited
Ireland
 
O.co Ireland.ie
O Agency Group, Inc.
Utah
 
Overstock.com Insurance
O.com Land, LLC
Utah
 
 
O.com Ventures, Inc.
Utah
 
 
tZERO Group, Inc.
Delaware
 
 
T0 Technologies LLC
Utah
 
 
Pro Securities, LLC
California
 
 
SpeedRoute LLC
New York
 
 
Revolution 4 LLC
Utah
 
 
Data IFX S.A.S.
Columbia
 
 
DeSoto, Inc.
Delaware
 
 
Overstock.com Cars, Inc.
Utah
 
 
O.com Gift Cards, Inc.
Utah
 
 
Medici Ventures, Inc.
Delaware
 
 
Overstock Europe Limited
United Kingdom
 
 
O.co HK Limited (HK)
Hong Kong
 
 
Medici Land Governance, Inc.
Delaware
 
 
Medici Land Governance, Ltd.
Zambia
 
 
O Real Estate, Inc.
Utah
 
 
Mac Warehouse, LLC
Utah
 
 
SiteHelix, Inc.
Delaware
 
 
TZERO CRS, Inc.
Delaware
 
 
Blue Ocean Technologies, LLC
Delaware
 
 
Verify Investor, LLC
California
 
 





Exhibit 23
Consent of Independent Registered Public Accounting Firm

The Board of Directors
Overstock.com, Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 333-181422, 333-184344, 333-162674, 333-160512, 333-124441, 333-123540, 333-203175, and 333-203176) on Form S-8 and (Nos. 333-207141 and 333-226729) on Form S-3 of Overstock.com, Inc. of our reports dated March 18, 2019 , with respect to the consolidated balance sheets of Overstock.com, Inc. as of December 31, 2018 and 2017 , the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2018 , and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and the effectiveness of internal control over financial reporting as of December 31, 2018 , which reports appear in the December 31, 2018 annual report on Form 10-K of Overstock.com, Inc.

Our report dated March 18, 2019 , on the consolidated financial statements refers to a change in the method of accounting for revenue from contracts with customers in 2018 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) .


/s/ KPMG LLP
Salt Lake City, Utah
March 18, 2019





Exhibit 31.1
 
CERTIFICATION
 
I, Patrick M. Byrne, certify that:
 
1.               I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.;
 
2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.              The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.             designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.             designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.              evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.             disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.               The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.             all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
3/18/2019
/s/ PATRICK M. BYRNE
 
 
Patrick M. Byrne
 
 
Chief Executive Officer
 
 
(principal executive officer)





Exhibit 31.2
 
CERTIFICATION
 
I, Gregory J. Iverson, certify that:
 
1.               I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.;
 
2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.              The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.             designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.             designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.              evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.             disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.               The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.             all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
3/18/2019
/s/ GREGORY J. IVERSON
 
 
Gregory J. Iverson
 
 
Chief Financial Officer
 
 
(Principal Financial Officer and Principal Accounting Officer)





Exhibit 32.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
 
PURSUANT TO
 
18 U.S.C. SECTION 1350,
 
AS ADOPTED PURSUANT TO
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Patrick M. Byrne, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial condition and results of operations of Overstock.com, Inc.
 
Date:
3/18/2019
/s/ PATRICK M. BYRNE
 
 
Patrick M. Byrne
 
 
Chief Executive Officer
 
 
(principal executive officer)






Exhibit 32.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
 
PURSUANT TO
 
18 U.S.C. SECTION 1350,
 
AS ADOPTED PURSUANT TO
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Gregory J. Iverson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial condition and results of operations of Overstock.com, Inc.
 
Date:
3/18/2019
/s/ GREGORY J. IVERSON
 
 
Gregory J. Iverson
 
 
Chief Financial Officer
 
 
(Principal Financial Officer and Principal Accounting Officer)






Memorandum of Understanding

Investment in tZERO, Inc.

Dated: February 28, 2019

This memorandum of understanding (the "MOU") is intended to describe the general terms and conditions of a proposed investment in t0.com, Inc. ("tZERO"), by the entities set forth under the heading "Investors" on the signature page hereto (collectively, the " Investors"), and is subject to the negotiation and execution of a term sheet, definitive purchase and sale agreement and any other agreement that may be necessary to effect the transaction . Parties of this MOU share the goal of commencing a transaction, within the parameters and timing highlighted below.
Transaction: The Investors will purchase, and tZERO will sell (the "Transaction"), up to One Hundred Million Dollars ($100,000,000.00) worth of tZERO's voting common stock (the "Common Stock"), based on a $[1,500,000,000] post-money valuation of tZERO . Both the Investors shall co- lead this Transaction.
(i)
Following the closing of the Transaction, the Investors shall have the right to propose coin and token offerings to be launched on the tZERO Token Trading Platform. Such proposals shall be subject to tZERO's acceptance, which acceptance may not be unreasonably withheld, conditioned or delayed. Following tZERO's acceptance of a proposed offering to be carried out on the tZERO Token Trading Platform, tZERO shall exercise reasonable commercial efforts to ensure such offering is carried out in a timely and orderly manner. The Investors shall use commercially reasonable efforts to assist tZERO in effectuating and promoting such offerings. The Investors shall further assist tZERO to expand in Asia and other regions in the world and provide linkages to key partners such as the digital bank into which Makara is actively leading an investment.
(ii)
To the extent permitted by applicable laws and regulations, in the event tZERO undertakes any future offerings of tZERO equity securities or issues any tokens or coins, the Investors shall have the right to participate in such offerings and to nominate additional investors to participate in such offerings on terms no less favorable to the Investors and any of their nominees than the terms offered to any other investor in such offering.
Structure: The Parties agree that they will structure the payment of the Purchase Price in a tax efficient manner and that any such structure will be subject to the mutual agreement of the Parties.
Due Diligence: tZERO will give the Investors and their respective accountants, attorneys, partners, consultants, financing sources and all other representatives and agents of the Investors full access to tZERO's management, consultants, accountants, advisors and all other representatives, and to all properties, operating and financial data, records, agreements and other information relating to the Transaction, to the extent reasonably requested by the Investors and legally allowed by U.S. securities laws and without causing OSTK to provide material nonpublic information to the Investors.
Confidentiality: The Parties agree to extend the Confidentiality Agreement by and between
tZERO and Investors, but agree that tZERO and OSTK, as applicable, may issue a press release, file a Current Report on Form 8-K with the U.S. Securities and Exchange Commission, and make such other public disclosures as are required by law.
Indemnification : The Transaction Documents shall include such provisions regarding indemnification and limitations on claims as are customary for transactions of a similar size and nature to the Transaction.
Intention: No legally binding obligations shall be created, implied or inferred unless and until the Parties proceed with the Transaction Documents in final form, namely a Subscription Agreement and a Shareholders Agreement, which are to be executed and delivered by all Parties. This MOU represents an indication of interest and does not constitute a legally binding offer, obligation, undertaking, or limitation, on the part of any party hereto concerning purchase of any shares in tZERO, nor does it impose any obligation to make such an offer or enter into any agreements.
Validity: This MOU shall come into force as of the date of its signing by the Parties and will remain in force until March 30, 2019. The Parties may decide to extend the validity of this MOU by mutual written consent signed by their authorized representatives.
Closing Conditions: The obligations of the Investors to consummate the Transaction will be subject to, among other things, the satisfaction of the following conditions:
(i)
satisfactory completion of legal, accounting, tax, financial, commercial and environmental due diligence;
(ii)
negotiation, execution and delivery of satisfactory and mutually acceptable Transaction Documents;
(iii)
absence of any material adverse change in the business, results of operations, condition (financial or otherwise) or prospects of TZERO;
(iv)
absence of any material adverse change in the financial markets or economic conditions;
(v)
receipt of all necessary governmental, board of directors, investment committee and third-party approvals; and true and correct representations and warranties as of the Closing Date
Representations and Warranties: The Transaction Documents will contain representations and warranties that are customary for transactions of this size and nature.





Governing Law: The Transaction Documents and this MOU will be governed by the laws of the State of Delaware.
Dispute Resolution: Any controversy, conflict or dispute of any nature arising out of or relating to the Transaction contemplated herein will be settled exclusively and finally by arbitration governed by ICC rules carried out in Singapore . TZERO and 'Entity to be nominated' will each select one arbitrator to represent them, and the two arbitrators together will select a third arbitrator for the proceedings .
Expenses: Each Party will bear its own expenses.
Timing : Target funding by Mid-April 2019.
IN WITNESS WHEREOF, the undersigned have executed this MOU as of the date first set forth above.
T0.COM, Inc.

/s/ Saum Noursalehi
By: Saum Noursalehi     
Title: Chief Executive Officer

INVESTORS:

Makara Capital Partners Pte Ltc

/s/ Ali Ijaz Ahmad
By:/s/ Ali Ijaz Ahmad
Title: Director

GoldenSand Capital Ltd

/s/Sonny Wu
By: Sonny Wu
Title: Director